Vard Holdings warned that its 2Q2013 financial results (due 11/7/2013) are likely to be below current consensus estimates due to difficulties in its operations in Brazil. The group had previously guided that its Brazil operations are coming under control and would stabilize by year-end. However, after a recent assessment, management found further delays, cost over-runs at its Niteroi yard due to lower-thanexpected productivity, additional costs for outsourcing and higher start-up costs at the Promar yard. These issues have adversely impacted its 2Q margin, although its operations elsewhere are stable.
Brazil operations continue to trouble
Like other shipyards in Brazil, Vard’s operations in the country face headwinds arising from a high personnel turnover and a tight subcontracting market. This implies higher execution risks, often resulting in delivery delays and cost over-runs. At its Niteroi yard, repeated delays on a hull construction by subcontractors led to higher costs and a likely push-back of its overall delivery schedule. Until the delivery of its last vessel (by Sep-14), management thinks that Niteroi operations would continue to negatively impact group performance. Similarly, start-up costs at the new Promar yard have also crept up, likely due to higher subcontracting costs for vessels LPG1 and LPG2. If the situation persists, it is possible that the other 6 LPG vessels in its order-book could also be negatively affected.
Switch to PBR on poor earnings visibility
Vard’s issues in Brazil are not new. The surprise was management’s about-turn in its outlook for the country, after previously guiding for operational stabilization by end-2013. This suggests that the situation in Brazil is more fluid than previously thought. In view of the poor earnings visibility, we switched our valuation methodology to PBR. We also cut our FY13F/14F net profit estimates by 20-25%. Downgrade to HOLD with a lower FV estimate of S$0.93 (previously S$1.52) using 1.5x PBR (2 std dev below).
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