Vard Holdings expects marginally negative EBITDA for 3Q14

In a profit guidance issued last night, Vard Holdings announced that it expects a marginally negative EBITDA result for 3Q14. Though significant investments have been made in order to reach production targets at Vard Promar in Brazil, slower-than-expected improvements in throughput and productivity at the new shipyard are impacting profitability during the ramp-up phase. Additional cost was also incurred for the two vessels in the Promar order book that were built at a third-party yard and are currently undergoing outfitting at Vard Niterói. In 3Q14,

Vard has also revised its estimates for a limited number of projects in its European order book where cost overruns were incurred. Separately, regarding the tax claim received from authorities in Brazil and announced on 5 Aug 2014, Vard wishes to clarify that following further assessment of its legal position, it intends not to make any provisions for the tax claim in its financial accounts. With a change in analyst coverage, we put our HOLD rating and fair value estimate of S$0.94 under review

Vard Holdings Technical BUY with +11.7% potential return

BUY with a target price of S$0.95 as the stock appears to have reversed its downtrend and prices could have bottomed out at S$0.75 at the moment.

Watch to see if its 20-day EMA could cross above its 50-day EMA as the stock looks poised to break above S$0.87 with comparatively high volume on the back of a +DI/-DI crossover.

Protective stops could be placed at S$0.78.

Vard Holdings - Brazil operations worse than expected

Guiding lower
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