Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Mar-14 Vol m Results Review, Vard Holdings (VARD SP) Neutral (Maintained) Energy & Petrochemicals - Oil & Gas Services Target Price: SGD1.00 Market Cap: USD930m Price: SGD0.99 Wait And See Macro Risks Growth Value 1.30 1.20 1.10 VARD Holdings (VARD SP) Price Close Relative to Straits Times Index (RHS) 124 116 107 Vard s 1Q14 PATMI came in at 19% of our FY14F earnings, marking a third consecutive quarter of margin recovery. EBITDA margin was 6.4%, up from 5.1% in 4Q13. At the current rate of improvement, Vard should be able to meet our 7.6% margin forecast for FY14F. Its 1Q14 order wins were exceptional. We continue to prefer Nam Cheong for lower-risk exposure to OSV building. NEUTRAL, with a higher SGD1.00 TP. 1.00 0.90 99 91 An expected slow start to the year. Vard Holdings (Vard) s PATMI of NOK92m met 19% of our original FY14F forecast, but this was expected as margins are recovering with 1Q likely to be the weakest quarter. 0.80 0.70 35 30 25 20 15 10 5 82 74 Exceptional wins in 1Q14 unlikely to be repeated; order win forecasts raised to NOK14.5bn from NOK12bn. Vard won an outstanding NOK5.5bn of new orders in 1Q14, which management described as exceptional while we view as unlikely to be repeated. Enquiries continue to be strong, with surprisingly keen interest in even what appears to be the already-high global platform supply vessel (PSV) orderbook. Vard s current orderbook of NOK21.8bn hits a six-year peak, which we believe should lead to a positive revenue reversal trend in the coming years. Source: Bloomberg Avg Turnover (SGD/USD) 3.21m/2.55m Cons. Upside (%) -6.1 Upside (%) 1.4 52-wk Price low/high (SGD) 0.77-1.20 Free float (%) 44 Share outstanding (m) 1,180 Shareholders (%) Fincantieri 55.6 Share Performance (%) YTD 1m 3m 6m 12m Absolute 21.5 (1.0) 20.7 12.5 (7.1) Relative 19.1 (3.2) 14.8 11.4 (3.9) Shariah compliant Lee Yue Jer +65 6232 3898 yuejer.lee@sg.oskgroup.com Wait and see. Vard s EBITDA margins have improved for three consecutive quarters from the low of 4.1% in 2Q13. With utilisation at the Vietnam and Brazil yards normalising from under- and overloads, the company should be able to continue improving its margins to meet our FY14/15F forecasts of 7.6%/8.0%. The management maintains longterm margin guidance of 8-10%. Following an upward revision in our FY14/15F revenue by 8%/11% to reflect higher order wins assumption, we lift our earnings estimates by 4.5/5.3%. Maintain NEUTRAL, with revised SGD1.00 TP (from SGD0.85). Analyst Lee Yue Jer will assume coverage from Jason Saw. While operations appear to be improving, we note that valuations at 11x/8.5x FY14/15F P/Es appear fair. Investors should wait for a better entry point. Our TP is based on an 11x FY14F P/E, with the multiple being slightly higher than usual as earnings come off the trough. Sector-wise, we prefer Nam Cheong (NCL SP, BUY, TP: SGD0.48) as a lower-risk, lower-valuation exposure to offshore support vessel (OSV) shipbuilding. Forecasts and Valuations Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Total turnover (NOKm) 12,401 11,129 11,155 13,447 15,148 Reported net profit (NOKm) 1,594 804 357 512 656 Recurring net profit (NOKm) 1,594 804 357 512 656 Recurring net profit growth (%) 54.6 (49.6) (55.6) 43.3 28.3 Recurring EPS (NOK) 1.35 0.68 0.30 0.43 0.56 DPS (NOK) 0.69 0.59 0.17 0.19 Recurring P/E (x) 3.5 6.9 15.6 10.9 8.5 P/B (x) 1.59 1.77 1.51 1.33 1.20 P/CF (x) 4.6 5.6 na 2.8 14.0 Dividend Yield (%) 14.6 12.5 0.0 3.5 4.0 EV/EBITDA (x) 2.0 4.2 12.3 6.8 5.8 Return on average equity (%) 54.1 24.1 10.4 13.0 14.8 Net debt to equity (%) net cash 46.4 106.3 51.9 46.3 Our vs consensus EPS (adjusted) (%) (15.0) (19.4) See important disclosures at the end of this report Powered by EFA TM Platform 1
Vard Holdings (VARD SP) Additional Notes Figure 1: Quarterly financial results FYE 31 Dec (NOKm) 1Q13 4Q13 1Q14 q-o-q y-o-y Remarks Revenue 2,747 3,093 2,672-14% -3% Delivered four vessels in 1Q14-1 AHTS, 2 PSVs, and 1 specialised vessel. Materials, subcontract and others -1,823-2,165-1,799-17% -1% Salaries and related costs -485-599 -552-8% 14% Increase in workforce in Brazil from 200 to 1200. Also some additional labour costs from in-house fabrication instead of outsourcing. Others -135-171 -150-12% 11% EBITDA 304 158 171 8% -44% Depreciation and amortisation -29-45 -48 7% 66% Depreciation for 90% of Vard Promar in Brazil has begun. A large gantry crane remains to be installed. Operating profit 275 113 123 9% -55% Financial income 22 45 33-27% 50% Financial expense -34-76 -39-49% 15% Share of results 1 5 2-60% 100% Profit before tax 264 87 119 37% -55% Income tax -84 19-34 nm -60% Minority interest 8 7 7 0% -13% Net profit to equity holders 188 113 92-19% -51% Meets 18% of our revised FY14F forecast. Coming quarters expected to be stronger on continued margin recovery. Analysis EBITDA margins 11.1% 5.1% 6.4% Three consecutive quarters of EBITDA margin improvements. Higher utilisation at Vietnam yard going forward, and a reduced overload situation at Vard Niteroi in Brazil should assist in margin recovery Op margins 10.0% 3.7% 4.6% Income tax -32% 22% -29% PBT margins 9.6% 2.8% 4.5% Net margins 6.8% 3.7% 3.4% Source: Company data, OSK DMG estimates Figure 2: Normalising margins 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 EBITDA margin Rolling 12m EBITDA margin Source: Company, OSK-DMG See important disclosures at the end of this report 2
Vard Holdings (VARD SP) Figure 3: Order wins and net orderbook Source: Company Figure 4: Orderbook status See important disclosures at the end of this report 3
Vard Holdings (VARD SP) Financial Exhibits Profit & Loss (NOKm) Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Total turnover 12,401 11,129 11,155 13,447 15,148 Cost of sales (9,644) (9,275) (10,113) (11,953) (13,370) Gross profit 2,757 1,854 1,042 1,494 1,778 Other operating costs (550) (549) (562) (677) (763) Operating profit 2,207 1,305 480 816 1,015 Operating EBITDA 2,355 1,473 686 1,017 1,216 Depreciation of fixed assets (148) (168) (206) (201) (201) Operating EBIT 2,207 1,305 480 816 1,015 Net income from investments 10 (98) 9 10 10 Interest income 123 129 123 54 75 Interest expense (127) (111) (115) (62) (62) Pre-tax profit 2,213 1,225 497 819 1,039 Taxation (611) (434) (197) (262) (332) Minority interests (8) 13 57 (45) (50) Profit after tax & minorities 1,594 804 357 512 656 Reported net profit 1,594 804 357 512 656 Recurring net profit 1,594 804 357 512 656 Cash flow (NOKm) Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Operating profit 2,207 1,305 480 816 1,015 Depreciation & amortisation 148 168 206 201 201 Change in working capital (803) 272 (604) 1,261 (499) Other operating cash flow - (6) (50) (0) (0) Operating cash flow 1,552 1,739 32 2,278 717 Interest received 44 30 46 54 75 Interest paid (20) (10) (7) (62) (62) Tax paid (366) (766) (412) (262) (332) Cash flow from operations 1,210 993 (341) 2,009 399 Capex (119) (403) (811) (200) (200) Other new investments 1 (129) (6) - - Other investing cash flow (383) (109) (55) - - Cash flow from investing activities (501) (641) (872) (200) (200) Dividends paid (450) (1,278) (1) - (196) Increase in debt (81) 635 545 200 200 Other financing cash flow - 2 3 - - Cash flow from financing activities (531) (641) 547 200 4 Cash at beginning of period 2,851 3,064 2,437 1,745 3,672 Total cash generated 178 (289) (666) 2,009 203 Forex effects - (23) 19 - - Implied cash at end of period 3,029 2,752 1,790 3,754 3,875 See important disclosures at the end of this report 4
Vard Holdings (VARD SP) Financial Exhibits Balance Sheet (NOKm) Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Total cash and equivalents 3,064 2,437 1,745 3,672 3,875 Inventories 6,124 5,967 6,661 7,073 7,968 Accounts receivable 1,830 1,920 2,076 2,395 2,698 Other current assets 1 80 51 51 51 Total current assets 11,019 10,404 10,533 13,191 14,591 Total investments 292 530 730 740 750 Tangible fixed assets 1,011 1,384 2,167 2,166 2,165 Intangible assets 415 374 305 305 305 Total other assets 70 121 79 79 79 Total non-current assets 1,788 2,409 3,281 3,290 3,299 Total assets 12,807 12,813 13,814 16,481 17,890 Short-term debt 2,407 3,385 5,012 4,084 4,594 Accounts payable 4,871 4,319 3,616 5,526 6,225 Other current liabilities 1,536 1,096 595 595 595 Total current liabilities 8,814 8,800 9,223 10,205 11,414 Total long-term debt 231 545 673 1,801 1,491 Other liabilities 209 252 210 210 210 Total non-current liabilities 440 797 883 2,011 1,701 Total liabilities 9,254 9,597 10,106 12,216 13,115 Share capital 4,138 4,138 4,138 4,138 4,138 Retained earnings reserve (628) (987) (450) 62 522 Other reserves - - - (0) - Shareholders' equity 3,510 3,151 3,688 4,200 4,660 Minority interests 43 65 20 65 115 Total equity 3,553 3,216 3,708 4,265 4,775 Total liabilities & equity 12,807 12,813 13,814 16,481 17,890 Key Ratios (NOK) Dec-11 Dec-12 Dec-13 Dec-14F Dec-15F Revenue growth (%) 4.4 (10.3) 0.2 20.5 12.6 Operating profit growth (%) 83.0 (40.9) (63.2) 70.0 24.3 Net profit growth (%) 54.6 (49.6) (55.6) 43.3 28.3 EPS growth (%) 54.6 (49.6) (55.6) 43.3 28.3 Bv per share growth (%) 47.6 (10.2) 17.0 13.9 11.0 Operating margin (%) 17.8 11.7 4.3 6.1 6.7 Net profit margin (%) 12.9 7.2 3.2 3.8 4.3 Return on average assets (%) 12.7 6.3 2.7 3.4 3.8 Return on average equity (%) 54.1 24.1 10.4 13.0 14.8 Net debt to equity (%) (12.0) 46.4 106.3 51.9 46.3 DPS 0.69 0.59 0.17 0.19 Recurrent cash flow per share 1.03 0.84 (0.29) 1.70 0.34 See important disclosures at the end of this report 5
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Vard Holdings (VARD SP) SWOT Analysis Leading shipbuilder of high-end offshore support vessels, using its own technology An increase in offshore deepwater activities will spur demand for new vessels More vessels to be built in Brazil will lead to potential jobs for VARD South Korean shipyards moving into the large offshore support vessels market Attractive financing packages offered by competitors could lure new orders away Tight labour market in Brazil giving rise to workforce issues Narrowed focus on large and high-end vessels High worker costs in Norway Execution issues in Brazil P/E (x) vs EPS growth P/BV (x) vs ROAE 18 600% 2.5 70% 16 14 522% 444% 2.0 56% 12 10 367% 289% 1.5 42% 8 6 211% 133% 1.0 28% 4 2 56% -22% 0.5 14% 0-100% 0.0 0% P/E (x) (lhs) EPS growth (rhs) P/B (x) (lhs) Return on average equity (rhs) Company Profile Vard Holdings builds large, specialised offshore support vessels (OSVs) used in the offshore oil and gas industry. It has yards in Norway, Romania, Vietnam and Brazil. See important disclosures at the end of this report 6
1.20 1.82 0.85 NR 1.56 1.75 1.89 2.00 1.56 1.14 2.00 2.05 2.20 2.05 1.96 1.69 1.10 0.85 0.85 Vard Holdings (VARD SP) Recommendation Chart 2.0 1.8 Recommendations & Target Price Price Close 1.6 1.4 1.2 1.0 0.8 0.6 Nov-10 Sep-11 Aug-12 Jul-13 Buy Neutral Sell Trading Buy Take Profit Not Rated Source: OSK-DMG estimates, Bloomberg Date Recommendation Target Price Price 2014-02-26 Neutral 0.85 0.91 2014-01-02 Neutral 0.85 0.83 2013-12-31 Buy 0.85 0.82 2013-11-07 Neutral 0.85 0.85 2013-08-05 Buy 1.10 0.82 2013-07-12 Buy 1.10 0.84 2013-05-15 Buy 1.69 1.12 2013-05-03 Buy 1.82 1.06 2013-02-27 Buy 1.82 1.29 2013-02-15 Buy 1.96 1.29 Source: OSK-DMG estimates, Bloomberg See important disclosures at the end of this report 7
RHB Guide to Investment Ratings DMG & Partners Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage DISCLAIMERS This research is issued by DMG & Partners Research Pte Ltd and it is for general distribution only. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities. DMG & Partners Research Pte Ltd is a wholly-owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as RHBIB which in turn is a whollyowned subsidiary of RHB Capital Berhad) and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG & Partners Securities Pte Ltd and their associates, directors, and/or employees may have positions in, and may effect transactions in the securities covered in the report, and may also perform or seek to perform broking and other corporate finance related services for the corporations whose securities are covered in the report. This report is therefore classified as a non-independent report. As of 28 April 2014, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd, do not have proprietary positions in the subject companies, except for: a) - As of 28 April 2014, none of the analysts who covered the stock in this report has an interest in the subject companies covered in this report, except for: a) - DMG & Partners Research Pte. Ltd. (Reg. No. 200808705N) Kuala Lumpur Hong Kong Singapore Malaysia Research Office RHB Research Institute Sdn Bhd Level 11, Tower One, RHB Centre Jalan Tun Razak Kuala Lumpur Malaysia Tel : +(60) 3 9280 2185 Fax : +(60) 3 9284 8693 RHB OSK Securities Hong Kong Ltd. (formerly known as OSK Securities Hong Kong Ltd.) 12 th Floor World-Wide House 19 Des Voeux Road Central, Hong Kong Tel : +(852) 2525 1118 Fax : +(852) 2810 0908 DMG & Partners Securities Pte. Ltd. 10 Collyer Quay #09-08 Ocean Financial Centre Singapore 049315 Tel : +(65) 6533 1818 Fax : +(65) 6532 6211 Jakarta Shanghai Phnom Penh PT RHB OSK Securities Indonesia (formerly known as PT OSK Nusadana Securities Indonesia) Plaza CIMB Niaga 14th Floor Jl. Jend. Sudirman Kav.25 Jakarta Selatan 12920, Indonesia Tel : +(6221) 2598 6888 Fax : +(6221) 2598 6777 RHB OSK (China) Investment Advisory Co. Ltd. (formerly known as OSK (China) Investment Advisory Co. Ltd.) Suite 4005, CITIC Square 1168 Nanjing West Road Shanghai 20041 China Tel : +(8621) 6288 9611 Fax : +(8621) 6288 9633 Bangkok RHB OSK Indochina Securities Limited (formerly known as OSK Indochina Securities Limited) No. 1-3, Street 271 Sangkat Toeuk Thla, Khan Sen Sok Phnom Penh Cambodia Tel: +(855) 23 969 161 Fax: +(855) 23 969 171 RHB OSK Securities (Thailand) PCL (formerly known as OSK Securities (Thailand) PCL) 10th Floor, Sathorn Square Office Tower 98, North Sathorn Road,Silom Bangrak, Bangkok 10500 Thailand Tel: +(66) 2 862 9999 Fax : +(66) 2 108 0999 8