NRA Capital Pte Ltd

Written by: NRA Team

Monday 16 Mar 2015

Vard Holdings - press release

Order cancellation due to customer insolvency

Vard is seem overvalued compared to its peers

2 Platform Support Vessel (PSV) shipbuilding contracts have been terminated by Vard, following notification that the two clients, affiliates of E.R. Offshore, have filed for insolvency. Vard has received 10% instalment for one of the vessels, and aims to sell the vessels in the open market to recover its costs. Vard estimates they would be able to sell the vessels at a price that will cover the expected construction cost less the prepayment received.

Vard had announced in July 2014 that the E.R. Offshore affiliates had ordered a PSV, in addition taking over a sister vessel from Carlotta Offshore (originally ordered in May 2014) via a novation agreement. The two vessels were expected to be delivered in 3Q2015 and 2Q2016.

The financial impact of this contract cancellation is likely to be negative at this point. Major trends are not in Vards favour. Downward pressure on oil prices is creating a tough environment for PSV demand, and customers have begun delaying receipt of vessels by initiating variation orders. This will dampen overall Offshore Support Vessel (OSV) growth rate, but Vards own shipyards will be delivering less revenue per year. 

As it stands, Vard stated in its FY14 presentation on the 27th of February that they anticipated weaker order intakes for 2015 already. With less order intake and potential contract cancellations, yard utilization rates is likely to be further decreased. Orderbook visibility beyond 2016 is uncertain, with yard utilization inflated by the variation orders. New order value stood at NOK9.45b at the end of 2014, down from NOK14.17b at end 2013. Total orderbook value left at end of FY14 was NOK17.74b, compared with orderbook value of NOK19.36b at end of FY13. With the Brazil shipyards operating below efficiency, Vard is running into significant headwinds. With FY14 cost increases outweighing revenue growth, Vard is facing both internal and external pressure on its FY15 earnings visibility. 

Valuation comparison:

At 51 cents, Vard trades at 8.4x PER FY16 Bloomberg estimates, higher than its peers Nam Cheong (5.8x) and Yangzijiang Shipbuilding (6.8x). Analyst recommendations are pessimistic, with one sell call and three neutral calls.

We view Vard in overvalued in short-term, operating in a currently declining environment. Beset by internal delays to realizing cost efficiency at its Brazil yards. Vard faces significant headwinds. Barring unanticipated positive developments, we expect further downward revisions on earnings and share price in the short to medium term.

Market reaction to Vard has been muted, with the share dropping 1 cent from 52 cents to 51 cents by Monday close. The negative news surrounding Vard believe is not fully priced in yet.

 


Access to this Web site is granted by NRA Capital Pte. Ltd. strictly on the terms and subject to the conditions set out hereunder. By entering into the Web Site, Subscriber is deemed to have accepted and agreed to be bound by the terms and conditions  set out hereunder.