20130905-Maybank_KERPL-Vard_Holdings_Waiting_to_Re-rate_11页_818kb

Vard Holdings Summary

Core Content

Vard Holdings is a Norwegian shipbuilder specialising in the design and construction of high specification offshore support vessels (OSVs) for the offshore oil and gas sector. The company is currently being upgraded from a Hold to a Buy recommendation, with a target price (TP) of SGD1.12, up from SGD0.95. This upgrade is based on the belief that the current share price has overcompensated for execution issues in its Brazilian yards and that the company is on track to exceed its order win forecast.

Key Information

• Share Price: SGD0.86
• Target Price: SGD1.12
• Shares Issued (m): 1,180.0
• Market Cap (USD m): 795.8
• 3-mth Avg Daily Turnover (USD m): 5.2
• ST Index: 3,015.42
• Free Float (%): 44.4
• Major Shareholder: Fincantieri (55.6%)
• ROE (annualised, %): 9.9
• Net Gearing (x): 0.52
• NTA/shr (NOK): 2.61
• Interest Cover (x): 49.2

Main Points

1. Order Win Momentum

• Vard's YTD order wins have reached NOK11.5b, matching initial forecasts.
• The company is expected to exceed its full-year order win forecast, with a revised 2013 assumption of NOK13.4b.
• Recent order wins, including a large NOK6.5b OSCV from Technip-DOF, Farstad, and Carlotta Offshore, indicate strong demand for OSVs and a positive outlook from key customers.

2. Market Outlook

• Leading OSV owners are optimistic about long-term demand, particularly for high-end support vessels.
• Key demand areas include West Africa, Gulf of Mexico, North Sea, and Brazil.
• The subsea market is expected to support long-term OSV demand due to increasing number of subsea wells and installations.
• The North Sea market has seen strong utilisation and spot rates, with continued demand for AHTS and PSVs.

3. Execution in Brazil

• The Niteroi yard has faced execution challenges, but the new Promar yard is expected to perform better.
• Vard's revenue from Brazil yards is projected to be less than 17% of total revenue in any given year.
• The company's base case scenario assumes EBITDA margins of 7.9%, 9.5%, and 10.8% for FY13-15F, respectively, with conservative margin assumptions for Brazil.

4. Valuation and Risk-Reward Analysis

• The current share price of SGD0.86 is below the base case fair value of SGD1.12, which is based on 8x average FY13-15F earnings.
• The bull case fair value is SGD1.48, while the bear case is SGD0.80.
• The risk-reward tradeoff is deemed compelling, with limited downside risk and attractive upside potential.

5. Financial Forecasts

• Revenue: FY13F at NOK11,502m, FY14F at NOK12,527m, FY15F at NOK15,826m
• EBITDA: FY13F at NOK906m, FY14F at NOK1,193m, FY15F at NOK1,708m
• Recurring Net Profit: FY13F at NOK463m, FY14F at NOK756m, FY15F at NOK1,051m
• EPS (NOK): FY13F at 0.39, FY14F at 0.64, FY15F at 0.89
• EPS (SGD): FY13F at 0.09, FY14F at 0.14, FY15F at 0.19
• PER (x): FY13-15F at 10.1, 6.2, and 4.4
• EV/EBITDA (x): FY13-15F at 7.1, 5.4, and 3.8
• Dividend Yield (%): FY13-15F at 3.5, 5.2, and 7.0
• P/B (x): FY13-15F at 1.5, 1.3, and 1.0

6. Peer Valuation Comparison

• Vard's current valuation is below the mean PER and near the trough of P/B valuations compared to its peers.
• The company's fair value is higher than the current price, making it an attractive investment opportunity.

Conclusion

Vard Holdings is poised for a positive re-rating as it continues to secure new orders and maintain confidence in long-term OSV demand. Despite challenges in Brazil, the company's execution and financial performance are expected to improve, supporting its upgraded Buy recommendation with a target price of SGD1.12. The risk-reward tradeoff is considered attractive, with a compelling upside potential relative to downside risks.