Vard

Vard: gapped down more than 6% on 6 Aug as the shipbuilder of OSVs took a hit from news that it may face hefty tax fines from the Brazilian government. VARD recovered the bulk of its losses over the next two weeks, before pulling back again. Macquarie (MER) believes the tax issue will be out of the way in 3Q14 and focus will shift back on growth and orders. Sees a re-rating continuing from 4Q14, maintains TP of $1.45. Vard mgt presented at MER’s ASEAN Conference in Singapore. Key takeaways: Focus 1: Tax provision to be taken in 3Q14: VARD said that although they have a strong case against the Brazilian tax authorities for the NOK200m additional tax (includes penalty and interest costs of 9% over 4 years), they will take some provisions in 3Q14 itself. MER believes the actual additional tax could be much lower at NOK100-150m. Focus 2: Progress in Brazil: Although Brazil contributes around 20% to VARD’s revenues now, it is contributing 0% to profit according to management due to ramp up costs in the new Promar yard and the phasing out of old Niteroi yard. The good news is that the staffing for the new yard is complete with VARD having hired 1,400 employees. The construction of the new yard is also progressing on track. Focus 3: New order forecasts for 2H14: VARD expects 2H14 to be softer than 1H14 where it won a record NOK8.2bn of new orders. VARD expects NOK12-14bn of new orders in FY14. Jul and Aug are slow months due to the summer season and VARD is in discussions for new and large OSCV orders over the next 4 months. Focus 4: Order inflow outlook for 2015-16: While the new cost focus of oil companies and reduction of capex is shrinking the overall pie, VARD being a niche and not a volume player is not dependent on the overall market pie, according to management. VARD’s designs and niche products are the deciding factors for new orders which is why it seeks opportunities in customized high end categories like AHTS and PSV to be able to procure NOK12-14bn of new orders annually. Focus 5: Relationship and synergies with the new parent: VARD informed that the new parent Fincantieri is more synergistic than the old parent STX Corp. However, it is not involved in day to day operations, but on a strategic level, to help VARD cross-sell products and expand geographically.