1. business and industrial
2. company
3. joint venture

Company Update, 15 October 2014
Vard Holdings (VARD SP)
Sell (from Neutral)
Energy & Petrochemicals - Oil & Gas Services
Market Cap: USD759m
Target Price:
Price:
SGD0.57
SGD0.82
Macro
Risks
Second Axe To Earnings In a Week
Growth
Value
VARD Holdings (VARD SP)
Relative to Straits Times Index (RHS)
130
1.05
125
1.00
120
0.95
115
0.90
110
0.85
105
0.80
100
0.75
95
0.70
18
16
14
12
10
8
6
4
2
90
Jun-14
Feb-14
Avg Turnover (SGD/USD)
13.4
Upside (%)
-30.3
52-wk Price low/high (SGD)
0.79 - 1.16
Free float (%)
44
Share outstanding (m)
1,180
Shareholders (%)
Fincantieri
55.6
Share Performance (%)
Relative

3.50m/2.79m
Cons. Upside (%)
Absolute


Source: Bloomberg

Beware of falling trees. In our 10 Oct 2014 report - Lower Oil Prices
Hurt Deepwater Investments, we pointed out that street estimates
incorporated excessive variance (33-81% disparity in earnings forecasts,
basing off street lows) and that downgrades were likely. We had not
expected the tree to fall that quickly, but Vard’s profit guidance has now
put an end to near-term hopes for an earnings recovery.
Negatives from ongoing Brazilian woes, a new European angle. The
main reasons for the negative surprise were: i) slower-than-expected
improvements in throughput and productivity at the new shipyard, ii)
additional costs incurred for the two vessels in the Promar yard
orderbook that were built at a third-party yard, and iii) cost overruns for
some projects in its European orderbook. The European problems are
new and we believe these projects may be completed at zero margins
going forward.
Hopefully a third swing will not be necessary. We cut our earnings
estimates for a second time this week, reducing our FY14-FY16
expectations by 32%, 22% and 25%, as we trim our EBITDA margins
further to 5.4%, 6.0% and 6.6% respectively.
Book value may not hold. With forecast ROEs below 10%, we believe
that Vard may not deserve a premium on book value until a convincing
turnaround can be expected. We feel that our P/E valuation of 10x
blended FY14-15F earnings already incorporates some premium for its
high technical capability, as we value high-growth Nam Cheong (NCL
SP, BUY, TP: SGD0.58) at the same multiple. Should the market de-rate
Vard, there may still be downside to our TP. We reiterate that in this
period of market dislocation, high earnings growth and low valuations are
the best formula for lower-risk outperformance in a recovery scenario.
Vard cut to SELL (vs Neutral) with a lower SGD0.57 TP (vs SGD0.80).
YTD
1m
3m
6m
12m
Forecasts and Valuations
Dec-12
Dec-13
Dec-14F
Dec-15F
Dec-16F
0.6
(15.0)
(24.1)
(21.2)
(1.8)
Total turnover (NOKm)
11,129
11,155
12,247
13,148
12,666
(0.5)
(10.7)
(21.4)
(20.8)
(3.0)
Reported net profit (NOKm)
804
357
295
399
437
Recurring net profit (NOKm)
804
357
295
399
437
(49.6)
(55.6)
(17.3)
35.3
9.4
Recurring EPS (NOK)
0.68
0.30
0.25
0.34
0.37
DPS (NOK)
0.59
Shariah compliant
Lee Yue Jer, CFA +65 6232 3898
[email protected]
Recurring net profit growth (%)
Recurring P/E (x)
P/B (x)
P/CF (x)
Dividend Yield (%)
0.08
0.10
0.11
6.2
13.9
16.9
12.5
11.4
1.58
1.35
1.25
1.16
1.08
2.4
14.6
6.3
5.0
na
14.0
0.0
1.8
2.4
2.6
3.9
11.6
9.3
7.9
7.0
Return on average equity (%)
24.1
10.4
7.7
9.6
9.8
Net debt to equity (%)
46.4
106.3
52.4
47.2
33.9
(41.3)
(41.6)
(45.4)
EV/EBITDA (x)
Our vs consensus EPS (adjusted) (%)
Source: Company data, OSK-DMG
See important disclosures at the end of this report


3

.
3
0
.
1
0
0
.1
0
0
We were far from being sufficiently pessimistic when we slashed Vard’s .
0
earnings forecasts earlier this week. Vard has just guided for 0
“marginally negative” third-quarter EBITDA, surprising even our 0
bearish case. We take a second swing at Vard’s earnings estimates,
cutting FY14-FY16 forecasts by 32%, 22% and 25%. We believe its book
value may not hold and that a multiple de-rating is possible. Downgrade
to SELL with a lower SGD0.57 TP (vs SGD0.80), implying 30% downside.
Aug-14
135
1.10
Apr-14
140
1.15
Dec-13
1.20
Oct-13
Vol m
Price Close




Powered by EFA
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Platform
1
Vard Holdings (VARD SP)
15 October 2014
Financial Exhibits
Profit & Loss (NOKm)
Dec-12
Dec-13
Dec-14F
Dec-15F
Total turnover
11,129
11,155
12,247
13,148
12,666
Cost of sales
(9,275)
(10,113)
(11,167)
(11,900)
(11,397)
Gross profit
1,854
1,042
1,080
1,247
1,269
Other operating costs
(549)
Dec-16F
(562)
(617)
(662)
(638)
631
Operating profit
1,305
480
463
585
Operating EBITDA
1,473
686
664
786
832
(206)
(201)
(201)
(201)
480
463
585
631
9
15
15
15
Depreciation of fixed assets
Operating EBIT
(168)
1,305
Net income from investments
(98)
Interest income
129
123
47
78
87
Interest expense
(111)
(115)
(62)
(62)
(62)
Pre-tax profit
Taxation
Minority interests
1,225
(434)
497
463
616
672
(197)
(148)
(197)
(215)
13
57
(20)
(20)
(20)
Profit after tax & minorities
804
357
295
399
437
Reported net profit
804
357
295
399
437
Recurring net profit
804
357
295
399
437
Dec-12
Dec-13
Dec-14F
Dec-15F
Dec-16F
1,305
480
463
585
631
Depreciation & amortisation
168
206
201
201
201
Change in working capital
272
(604)
1,613
(264)
141
(50)
-
1,739
32
2,277
Source: Company data, OSK-DMG
Cash flow (NOKm)
Operating profit
Other operating cash flow
Operating cash flow
Interest received
(6)
(0)
522
0
973
30
46
47
78
87
(10)
(7)
(62)
(62)
(62)
(766)
(412)
(148)
(197)
(215)
993
(341)
Capex
(403)
(811)
Other new investments
(129)
(6)
-
-
Other investing cash flow
(109)
(55)
-
-
Cash flow from investing activities
(641)
(872)
Interest paid
Tax paid
Cash flow from operations
Dividends paid
Increase in debt
Other financing cash flow
Cash flow from financing activities
Cash at beginning of period
Total cash generated
Forex effects
Implied cash at end of period
(1,278)
(1)
(200)
784
(200)
(199)
-
(200)
(199)
(89)
(120)
200
201
-
-
-
547
200
111
81
2,437
1,745
3,777
4,030
253
666
2
3
(289)
(666)
2,114
(23)
19
-
-
3,859
4,030
2,752
-
-
545
3,064
(200)
341
200
635
(641)
2,114
1,790
1
4,697
Source: Company data, OSK-DMG
See important disclosures at the end of this report
2
Vard Holdings (VARD SP)
15 October 2014
Financial Exhibits
Balance Sheet (NOKm)
Dec-12
Dec-13
Dec-14F
Dec-15F
Dec-16F
Total cash and equivalents
2,437
1,745
3,777
4,030
4,697
Inventories
5,967
6,661
6,442
6,916
6,662
Accounts receivable
1,920
2,076
2,181
2,341
2,256
Other current assets
80
51
51
51
51
10,404
10,533
12,451
13,338
13,666
Total current assets
Total investments
530
730
745
760
775
1,384
2,167
2,166
2,165
2,163
Intangible assets
374
305
305
305
305
Total other assets
121
79
79
79
79
2,409
3,281
3,295
3,309
3,322
Tangible fixed assets
Total non-current assets
Total assets
12,813
13,814
15,746
16,647
16,988
Short-term debt
3,385
5,012
3,724
3,994
3,851
Accounts payable
4,319
3,616
5,033
5,403
5,205
Other current liabilities
1,096
595
595
595
595
Total current liabilities
8,800
9,223
9,352
9,992
9,651
Total long-term debt
545
673
2,161
2,091
2,435
Other liabilities
252
210
210
210
210
Total non-current liabilities
797
883
2,371
2,301
2,645
Total liabilities
9,597
10,106
11,723
12,293
12,296
Share capital
4,138
4,138
4,138
4,138
4,138
Retained earnings reserve
Shareholders' equity
Minority interests
Total equity
Total liabilities & equity
(987)
3,151
(450)
3,688
(155)
3,983
156
474
4,294
4,612
65
20
40
60
80
3,216
3,708
4,023
4,354
4,692
12,813
13,814
15,746
16,647
16,988
Source: Company data, OSK-DMG
Key Ratios (NOK)
Dec-12
Dec-13
Dec-14F
Dec-15F
Dec-16F
Revenue growth (%)
(10.3)
0.2
9.8
7.4
(3.7)
Operating profit growth (%)
(40.9)
(63.2)
(3.6)
26.4
7.9
Net profit growth (%)
(49.6)
(55.6)
(17.3)
35.3
9.4
EPS growth (%)
(49.6)
(55.6)
(17.3)
35.3
9.4
Bv per share growth (%)
(10.2)
17.0
8.0
7.8
7.4
Operating margin (%)
11.7
4.3
3.8
4.4
5.0
Net profit margin (%)
7.2
3.2
2.4
3.0
3.4
Return on average assets (%)
6.3
2.7
2.0
2.5
2.6
Return on average equity (%)
24.1
10.4
7.7
9.6
9.8
Net debt to equity (%)
46.4
106.3
52.4
47.2
33.9
DPS
0.59
0.08
0.10
0.11
Recurrent cash flow per share
0.84
1.79
0.29
0.66
(0.29)
Source: Company data, OSK-DMG
See important disclosures at the end of this report
3
Vard Holdings (VARD SP)
15 October 2014
SWOT Analysis
 Leading shipbuilder of high-end offshore support
vessels, using its own technology
 South Korean
shipyards
moving into the
large offshore
support vessels
market
 Attractive
financing
packages
offered by
competitors
could lure new
orders away
 An increase in
offshore
deepwater
activities should
spur demand
for new vessels
 Tight labour
market in Brazil
giving rise to
workforce
issues
 More vessels to
be built in Brazil
should lead to
potential jobs
 Narrow 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
40%
10
-2%
1
33%
8
-18%
1
27%
6
-33%
1
20%
4
-49%
0
13%
2
-64%
0
7%
0
-80%
0
0%
P/E (x) (lhs)
EPS growth (rhs)
Source: Company data, OSK-DMG
P/B (x) (lhs)
Jan-16
1
Jan-15
13%
Jan-14
47%
12
Jan-13
1
Jan-12
29%
Jan-16
53%
14
Jan-15
60%
2
Jan-14
2
44%
Jan-13
60%
16
Jan-12
18
Return on average equity (rhs)
Source: Company data, OSK-DMG
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
4
Vard Holdings (VARD SP)
15 October 2014
Recommendation Chart
Price Close
0.80
1.00
1.10
0.85
1.10
1.69
1.96
0.85
0.85
1.60
1.82
2.05
2.20
2.05
2.00
1.14
1.20
2.00
1.56
1.89
na
Recommendations & Target Price
1.80
1.56
1.75
2.00
1.40
1.20
1.00
0.80
Buy
0.60
Nov-10
Neutral
Nov-11
Sell
Trading Buy
Nov-12
Take Profit
Not Rated
Nov-13
Source: OSK-DMG, Bloomberg
Date
Recommendation
2014-10-10
Neutral
Target Price Price
0.80
0.84
2014-06-05
Neutral
1.10
1.11
2014-04-29
Neutral
1.00
0.96
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
Source: OSK-DMG, Bloomberg
See important disclosures at the end of this report
5
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
may10%
exceed
over 12
themonths
next 3 months, however longer-term outlook remains uncertain
Buy:
Share
price
mayprice
exceed
over15%
the next
Neutral: Buy:
ShareShare
price price
may fall
within
the 15%
rangeover
of +/the next
12 months
Trading
may
exceed
the10%
nextover
3 months,
however
longer-term outlook remains uncertain
Take Profit:
Target
been attained.
accumulate
lower
Neutral:
Share
priceprice
may has
fall within
the rangeLook
of +/-to10%
over theatnext
12 levels
months
Sell: Share
may
fall has
by more
10% Look
over the
next 12 months
Take
Profit:price
Target
price
beenthan
attained.
to accumulate
at lower levels
Not Rated:
Stockmay
is not
regular
coverage
Sell:
Share price
fallwithin
by more
thanresearch
10% over
the next 12 months
Not Rated: Stock is not within regular research coverage
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