Vard Holdings

Vard Holdings: Vard Holdings is reporting its 2Q13 after market today. The co had issued a profit warning on 1 July, which has sent the stock plunging 23.4% in ten days and to its lowest since Oct11 yesterday. Vard's senior management team based in Norway reviewed of the "outsourcing yards" in Brazil where Vard had outsourced the 4 old vessel orders for hull manufacturing. Seemingly, the project had fallen into higher cost overruns than what the management had thought earlier. Given the "cost plus" outsourcing contracts, Vard had to take the hit to its profit. House note that only 6 weeks back, during the 1Q13 results presentation, mgt had chalked out a new delivery schedule for the 5 vessels under construction in Brazil. One of them has been delivered while the other 4 are scheduled to be delivered in 3Q13, 1Q14, 1Q14 and 3Q14, respectively. The cost overruns on this project over the last 6 wks have come as a big surprise to the mgt too. Auditors have asked the management to include the "entire presumptive losses" on this project in 2Q13. How much are the losses from these 4 vessels? Macquarie thinks it's around NOK140m. The build price of the vessels was NOK1500m (for 4 vessels). Vard was supposed to make around 10% margin on these. So overall, it seems Vard has given up its NOK150m EBITDA on these 4 vessels and made around NOK140m loss. Macquarie estimates 2Q13 profit would be only around NOK50m, much below consensus estimate of NOK189m. 2Q13 EBITDA margin should be around 6.0% in MER’s view. For 3Q13/4Q13, expect Vard to start including "start-up costs" from its new Promar yard (which will hire 400 people). Thus, margins will improve in 2H13 but still around 10% in MER’s view. Including NOK140m of loss in these 4 vessels plus some startup costs in the new yard, Macquarie thinks 2013 EBITDA margins will come around 8%, which means full year profit should come around NOK650m vs houseearlier estimate of NOK874m. While Macquarie has an Outperform recommendation on Vard Holdings and a 12-mth TP of $1.82. House note that estimates are under review and think there is potential downside risk of approximately 25% to 2013’s earnings and approximately 15% to 2014’s earnings profit estimates.