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
yuejer.lee@sg.oskgroup.com
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
TM
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
Disclosure & Disclaimer
DISCLAIMERS
All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or
warranty,
express
or implied,
as &
to Partners
its accuracy,
completeness
or correctness.
No distribution
part of this only.
reportIt is
to be
an offer
or solicitation
of an offer
This
research
is issued
by DMG
Research
Pte Ltd and
it is for general
does
notconstrued
have anyas
regard
to the
specific investment
to transact financial
any securities
or and
financial
instruments
referred
to herein
otherwise.
ThisYou
report
is general
in nature
and has
been prepared for
objectives,
situation
particular
needs ofwhether
any specific
recipient
of thisorresearch
report.
should
independently
evaluate
particular
information purposes
only.
is intended for
circulation
to the
clients
of RHB
its relatedorcompanies.
Any
contained
in securities
this reportor
does
investments
and consult
anItindependent
financial
adviser
before
making
any and
investments
entering into
anyrecommendation
transaction in relation
to any
not have regard
to thementioned
specific investment
objectives, financial situation and the particular needs of any specific addressee. This report is for the
investment
instruments
in this report.
information of addressees only and is not to be taken in substitution for the exercise of judgment by addressees, who should obtain separate legal or
financial
advice to
independently
particular
investments
strategies.
The
information
contained
herein evaluate
has beenthe
obtained
from
sources weand
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
This report
may further consist of, whether in whole or in part, summaries, research, compilations, extracts or analysis that has been prepared by RHB’s
without
notice.
strategic, joint venture and/or business partners. No representation or warranty (express or implied) is given as to the accuracy or completeness of such
information
and accordingly
investors
theirorown
informedofdecisions
on the
same.
This report does
not constitute
or formshould
part of make
any offer
solicitation
any offer before
to buy relying
or sell any
securities.
RHB, &itsPartners
affiliatesResearch
and related
companies,
their respective
directors,
parties
employees
mayOSK
ownInvestment
or ha ve positions
in
DMG
Pte Ltd
is a wholly-owned
subsidiary
of DMGassociates,
& Partners connected
Securities Pte
Ltd, aand/or
joint venture
between
Bank
securitiesMalaysia
of the company(ies)
covered
in this
research
report or any
securities
thereto,
andismay
fromto
time
to time add
to, or
or may be
Berhad,
which have since
merged
into
RHB Investment
Bank
Berhad related
(the merged
entity
referred
as “RHBIB”
which
i n dispose
turn is a off,
whollymaterially
interested
in any
such securities.
Further,
RHB,
its Pacific
affiliatesHoldings
and related
companies
do and
seek to doBank
business
w ith
the company(ies)
covered
owned
subsidiary
of RHB
Capital
Berhad) and
Deutsche
Asia
Pte Ltd
(a subsidiary
of Deutsche
Group).
DMG
& Partners Securiti
es
in this
report
may from time
to timeSecurities
act as market
maker
or have assumed an underwriting commitment in securities of such company(ies),
Pte
Ltdresearch
is a Member
of and
the Singapore
Exchange
Trading
Limited.
may sell them or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory or
underwriting
services
for or Pte
relating
to such
as well and/or
as solicit
such investment,
other
from
any entity in
mentioned
in this
DMG & Partners
Securities
Ltd and
their company(ies),
associates, directors,
employees
may haveadvisory
positionsorin,
and services
may effect
transactions
the securities
researchinreport.
covered
the report, and may also perform or seek to perform broking and other corporate finance related services for the c orporations whose securities
are covered in the report. This report is therefore classified as a non-independent report.
RHB and its employees and/or agents do not accept any liability, be it directly, indirectly or conseq uential losses, loss of profits or damages that may arise
from
reliance 2014,
basedDMG
on this
report or Securities
further communication
given
in relationincluding
to this report,
where
such losses
, loss
of profits
or damages are
As
ofany
14 October
& Partners
Pte Ltd and its
subsidiaries,
DMGincluding
& Partners
Research
Pte Ltd,
do not
have proprietary
alleged toinhave
arisen due
to the contents
such report or communication being perceived as defamatory in nature.
positions
the subject
companies,
except of
for:
a)
The term “RHB” shall denote where applicable, the relevant entity distributing the report in the particular jurisdiction mentioned specifically herein below
andofshall
refer to RHB
Institute
Sdnwho
Bhd,
its holding
company,
subsidiaries
related
companies.
As
14 October
2014,Research
none of the
analysts
covered
the stock
in thisaffiliates,
report has
an interestand
in the
subject
companies covered in t his report, except
for:
a)
All Rights Reserved. This report is for the use of intended recipients only and may not be reproduced, distributed or publish ed for any purpose without prior
consent
of RHB and
RHB accepts
no liability
whatsoever
for the actions of third parties in this respect.
DMG
& Partners
Research
Pte. Ltd.
(Reg. No.
200808705N)
Malaysia
Kuala Lumpur
Hong Kong
Singapore
This report is published and distributed in Malaysia by RHB Research Institute Sdn Bhd (233327-M), Level 11, Tower One, RHB Centre, Jalan Tun Razak,
50400 Kuala Lumpur,
a wholly-owned
RHB
Investment
(RHBIB),
in turn is a wholly-owned
Malaysia Research
Office subsidiary ofRHB
OSK
SecuritiesBank
Hong Berhad
Kong Ltd.
(formerlywhich
known
DMG & subsidiary
Partners of RHB Capital
Berhad.
as OSK Securities
Securities Pte. Ltd.
RHB Research Institute Sdn Bhd
Hong Kong Ltd.)
Level 11, Tower One, RHB Centre
10 Collyer Quay
th
Jalan Tun Razak
12 Floor
#09-08 Ocean Financial Centre
Kuala Lumpur
World-Wide House
Singapore 049315
Malaysia
19 Des
Voeux Road
: +(65) 6533subsidiary
1818
This report is published
and distributed in Singapore by DMG & Partners
Researc
h Pte Ltd (Reg. No. 200808705N), a Tel
wholly-owned
of DMG &
Tel : Pte
+(60)Ltd,
3 9280
2185venture between Deutsche Asia Pacific
Central, Holdings
Hong KongPte Ltd (a subsidiary of Deutsche Fax
: +(65)
6532and
6211OSK Investment
Partners Securities
a joint
Bank
Gr oup)
Fax : +(60) 3 9284 8693
Tel : +(852) 2525 1118
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 whollyFax : +(852) 2810 0908
Singapore
owned subsidiary of RHB Capital Berhad). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG &
Shanghaicovered in this report for its corporate finance
Phnom
Partners Securities PteJakarta
Ltd may have received compensation from the company
or Penh
its dealing activities; this
report is therefore classified as a non-independent report.
PT RHB OSK Securities Indonesia (formerly known as
RHB OSK (China) Investment Advisory Co. Ltd.
RHB OSK Indochina Securities Limited (formerly
OSKDMG
Nusadana
(formerly
as OSK including
(China) Investment
known asPte
OSKLtd
Indochina
Securities
Limited)
As of 14 October PT
2014,
& Partners Securities Pte Ltd
and itsknown
subsidiaries,
DMG & Partners Research
do not have
proprietary
Securities Indonesia)
Advisory Co. Ltd.)
No. 1-3, Street 271
positions in the securities
covered in this report, except for:
Plaza CIMB Niaga
Suite 4005, CITIC Square
Sangkat Toeuk Thla, Khan Sen Sok
a)
14th Floor
1168 Nanjing West Road
Phnom Penh
Jl. Jend. Sudirman Kav.25
Shanghai 20041
Fax : +(6221) 2598 6777
Fax : +(8621) 6288 9633
Cambodia
As of 14 October
of Indonesia
the analysts who covered the securities in this
report has an interest in such securities, Tel:
except
for:23 969 161
Jakarta 2014,
Selatannone
12920,
China
+(855)
a)
Tel : +(6221) 2598 6888
Tel : +(8621) 6288 9611
Fax: +(855) 23 969 171
Special Distribution by RHB
Bangkok
Where the research report is produced by an RHB entity
(excluding
DMG
& Partners
Pte Ltd) and distributed in Singapore, it is only distributed
RHB OSK
Securities
(Thailand)
PCLResearch
(formerly known
to "Institutional Investors", "Expert Investors" or "Accredited Investors"
as defined
in the Securities
and Futures Act, CAP. 289 of Singapore. If you are not
as OSK Securities
(Thailand)
PCL)
an "Institutional Investor", "Expert Investor" or "Accredited 10th
Investor",
this research
is not intended for you and you should disregard this research
Floor, Sathorn
Square report
Office Tower
report in its entirety. In respect of any matters arising from, or 98,
in connection
with
this research report, you are to contac t our Singapore Office, DMG &
North Sathorn
Road,Silom
Bangrak, Bangkok 10500
Partners Securities Pte Ltd
Hong Kong
Thailand
Tel: +(66) 2 862 9999
Fax : +(66) 2 108 0999
This report is published and distributed in Hong Kong by RHB OSK Securities Hong Kong Limited (“RHBSHK”) (formerly known as OSK Securities Hong
Kong Limited), a subsidiary of 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 wholly-owned subsidiary of RHB Capital Berhad.
RHBSHK, RHBIB and/or other affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject company.
6
RHBSHK, RHBIB and/or other affiliates may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain
compensation for investment banking services from the subject company.
Risk Disclosure Statements