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Vard Holdings: Initiating coverage.

Thursday, July 11, 2013

I have always liked the sound of the phrase "initiating coverage". It reminds me of some movies I watched before where a person in a war room would be standing ready to press a red color button while announcing "initiating launch sequence now". Quite exciting.

Well, talking about Vard Holdings might not create the same kind of excitement for some readers especially for those who have bought the stock at much higher prices. For sure, there is no paucity of BUY calls from analysts on Vard Holdings.


I remember replying to a reader a couple of months ago that we could see a rebound because of a positive divergence but with the downtrend intact, share price could go lower.

In yesterday's session, Vard Holdings' share price hit a new 12 months low of 83c. So, is share price at the start of a recovery today? This is a question I do not have the answer to. However, technically, there is no reversal signal. So, if share price should trend lower, it would not surprise me.

If it should trend lower, a critical support would be at 79c, the low formed in October 2011. Remember, this is what I see in the chart and it does not mean that it will happen.

Of course, there is always a possibility of a sharp rebound in which case, we could see a gap covering at 96c or a test of gap resistance at 99.5c.

Fundamentally, it is quite easy to see why there are so many BUY calls.

Doing a quick valuation exercise, at 83c a share, Vard Holdings does not seem expensive. In fact, it seems quite cheap now. I went through the numbers and its 1Q FY13 EPS works out to be 3.37c. Annualising this and using a PER of 7x will give us a value of 94.5c while a PER of 8x will give us a value of $1.08.  Why 7x or 8x? Well, that is the kind of PERs we are looking at with smaller yards like ASL Marine and Marco Polo Marine. 

So, at 83c, Vard Holdings is actually trading at an even lower valuation compared to smaller yards? Yes, that would seem to be the case from a price earnings perspective.

If we believe that the demand for OSVs is on the rise, then, Vard Holdings should be a logical beneficiary. However, we should bear in mind that although the stock might seem like a compelling buy, share price could weaken further. So, unless we are mentally prepared for such a possibility, it might be better to wait for clearer signs of a reversal.

After all, Vard Holdings did issue a profit warning due to higher than expected cost overruns at its Niteroi yard as well as higher than expected start-up costs at its new yard, Promar, which was what sent its share price diving.

Related post:
Marco Polo Marine: 1H FY2013.

Note:
Vard Holdings Limited ("VARD") will release its financial results for the second quarter and half year ended 30 June 2013 after market closes on Thursday 11 July 2013.

25 comments:

AK71 said...

Meanwhile, demand for more complicated and customised OSVs to support work in deeper and more treacherous waters in areas such as Brazil and the North Sea is also expected to remain robust, making high-end OSV builder Vard a promising bet. While Vard’s earnings for 1Q2013 were affected by project delays and high operational costs at its yards in Brazil, the company still had a strong order book comprising 46 vessels worth NOK15.5 billion ($3.4 billion). Since 1Q2013, it has won three more orders, taking its order book to an estimated NOK16.4 billion, “implying nearly 16 months of revenue visibility”, Saw notes in a May 15 report.

More importantly, Vard’s earnings are expected to rebound by at least 5% y-o-y next year, after its second yard in Brazil becomes operational and potential teething problems are resolved. The company expects to win orders for larger OSVs from deepwater operators this year and has allocated more than NOK600 million for upgrading and raising the capacity of its yards in Brazil, Romania and Vietnam. “While near-term growth is unexciting, the stock is valued at an attractive 6.6 times FY2013 PE and we see near-term catalysts from large orders extending top-line visibility,” notes Saw.


Kang Wan Chern
Monday, 24 June 2013 22:11

Cory said...

Timely coverage of Vard Holdings. Is the Upside much more than the downside ? That may decide our investment direction !

AK71 said...

Hi Cory,

A most pertinent consideration.

If 2Q 2013 results are not as bad as feared, there is definitely a lot more upside than downside.

Technically, downside could be limited to 79c thereabouts, the low of October 2011.

If 2Q 2013 results turn out to be abysmal, then, we could see the 79c support broken which would be very bearish.

Stay nimble.

Jimmy Ng said...

Thanks for coverage AK. I think , this one will turned into gold soon, as you had touched it....

Nightmare_Angel said...

Hi AK71,

Seems like Vard holdings has an upside of 20-30% from its current share price! I believe you are vested in the stock?

Regards
QL

Nightmare_Angel said...

HI AK71,

Seems like there's an upside of 20-30% for this stock but the earnings warning does reduce some interest in the stock. I believe you're vested in the stock?

Regards
QL

AK71 said...

Hi Jimmy,

Well, we can always hope, I guess. ;)

AK71 said...

Hi QL,

Yes, I am vested although only very recently. ;)

yeh said...

Hi AK.
I would like to q tomorrow for this stock also.
Not because I saw your this thread
Because my finance manager friend and my broker also recommend me this stock:)

Haha. 英雄所见略同。you and my those experts friends are having same view:)

AK71 said...

Hi yeh,

That is reassuring, I think. ;p

Which way the share price goes will probably depend on the 2Q 2013 results. :)

betta man said...

Hi AK,

how would you rate Vard's 2Q 2013 results ?

AK71 said...

Hi BM,

The bad news really is pretty much expected. It is just how bad it is and, sadly, it is worse than I expected.

Look at the Income Statement on page 17 of the presentation. 2Q 2013 has turned in a loss. This has eroded the profit made in 1Q 2013.

Look at page 21 which shows earnings per share (EPS). Due to losses incurred in 2Q 2013, 1H 2013 EPS is a paltry 3.05c.

We can only hope that the problems with one of its yards in Brazil, Vard Niteroi, will be resolved quickly although the management said they need more time. There is good progress in its other yard, Vard Promar, in the meantime.

The teething problems Vard Holdings has with its Brazilian yards could be regarded as a one off event. If so, earnings should improve in the quarters ahead.

We can be more conservative, however, and assume that losses in similar amounts would be incurred in Q3 and Q4. This would bring full year EPS down to only 2.3c! This would be a nightmare for Vard Holdings and its shareholders.

However, if 3Q and 4Q should see a repeat of 1Q's earnings which was already rather low, we could see full year EPS at almost 10c. At 8x PER, this would mean a fair value of about 80c a share.

Although I do not know how Mr. Market would react to the results, I would be surprised if he is happy with them.

See:
2Q 2013 Results Presentation.

Musicwhiz said...

Look to the cash flow statement for clues on how the business is doing. I see they are burning through a lot of cash for 1H 2013 - is this a cause for concern? What are their normalized capex levels, and are these in line with long-term historical trends?

The OSV market for smaller vessels is quite over-supplied, from what I understand. Maybe you can look at how Ezra (market leader) is doing with its larger AHTS and also PSV/OSV. This should give a clue on charter rates and utilization levels.

Is the yard problem really one-off, and what is its nature? Why can't Management resolve it in an expedient manner?

It's probably a little risky to peg PERs based on other competitors. Instead, use historical PER and see if it's expensive on that basis. Ask if there has been a structural change in the industry, or if the current problems are all temporary.

Regards.

AK71 said...

Hi MW,

CAPEX is at an elevated level as they are positioning themselves for a higher level of efficiency and greater capacity.

Charter rates for OSVs are on the mend and there will be a greater demand for OSVs which tags onto the demand for rigs which has seen very healthy growth.

Vard Holdings specialises in larger OSVs and have their own designs. They have distinct competitive advantages which smaller yards cannot replicate or do so with ease.

As for the problems at the two yards in Brazil, one has to do with higher than expected start up costs and the other one has to do with stickier operational issues. So, in the case of the former, it is probably a one off matter while in the case of the latter, more time is required as the management resolves issues systematically.

Historically, STX OSV traded at an average PER of 7x to 8x as well. Its average PER last year was about 9.5x.

Although most analysts are of the opinion that Vard Holdings should trade at a premium compared to smaller yards, I never did see much reason to follow. So, instead I use valuations of smaller yards as a yardstick (pun unintended).

The industry is cyclical and the weakness is also cyclical. I do not see any structural issues although I have to admit that I am not an expert here.

I see improving fortunes for OSV builders and suppliers which is why I am also heavily invested in Marco Polo Marine which has an added advantage of being protected by the Cabotage Law in Indonesia.

Of course, circumstances of each company are different. The challenges which Vard Holdings are faced with are unique and we can only hope that its experienced management delivers better results in due course.

AK71 said...

Given that VARD’s results are broadly below consensus, we expect the street to cut its FY13-14F estimates.

We also lower our FY13-14F net profit estimates by 20-25%, and cut
our FV to S$0.80 (previously S$0.93) on 1.2x PBR (previously 1.5x).

Downgrade from Hold to SELL.


OCBC Research

AK71 said...

We believe that the 23% fall in share price since the company’s profit guidance has priced in its Brazilian woes.

Given the recent setbacks, we believe that Vard needs to work hard to regain investors’ confidence.

We would revisit the stock upon stronger-than-expected orders or quarterly earnings.


CIMB

Cory said...

Just gut feeling, the price still have more room to move lower as I am not sure the problem has been resolved. Unlikely not.

AK71 said...

Hi Cory,

Support might break and the next support is at 79c. That is all I can say. Will it happen? Only Mr. Market has the answer, of course. ;)

vansontan said...

I really hope shipping sector can recover soon. I have several Cosco lots too.

AK71 said...

Hi Vanson,

Well, analysts have been talking about how container shipping might be bottoming. Is it? I don't know.

However, I do know that the OSV sector will see stronger demand and that is why I have been keeping an eye on Vard since the time it was $1.2+.

Although still in a downtrend, I feel that a smallish long position at current prices is not too much for my heart to take. ;p

AK71 said...

Vard Holdings, a builder of offshore support vessels, said it will close 2013 with its biggest annual order in six years as oil and gas companies boost spending on energy exploration.

“We’re confident that we’ll be able to secure one or two orders at least” in the coming weeks, Holger Dilling, an executive vice president at Vard, said in a phone interview. “We are expecting the best order intake since 2007.”

Demand from North Sea, Brazil and West Africa and explorations in new areas such as the Arctic Sea may help boost orders for Vard’s specialised ships, Dilling said. Investment in exploration and production may rise to US$750 billion ($935 billion) next year as companies seek to add reserves and expand output, the IFP Energies Nouvelles policy group said last month.


Bloomberg, 11 Nov 13.

Capricon said...

Ak, just curious, are you still vested in Vard ? What is your opinion after their recent full year ? Unfortunately no dividend.

Thanks

AK71 said...

Hi Capricon,

I sold this a while ago and allocated the funds to Marco Polo Marine.

The top down picture for the industry is very good but Vard still need to get their Brazilian yards in order. It seems to be taking much longer than expected. This suggests that the problems could be deep seated and hard to rectify.

Capricon said...

AK, would you consider YangZiJiang since you have confidence in the industry ?
The CEO has majority holdings and committed 5ct dividend.

thanks

AK71 said...

Hi Capricon,

Mike (aka Sillyinvestor) has done extensive research into YZJ and he is also a shareholder. I would suggest a visit to his blog. Link is found in my blog's left sidebar under "RESOURCES".

My plate is full at the moment and I am not considering any additions to my portfolio now.

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