Vard

Vard: Though it has fallen 42% in six months, OSK DMG thinks that Vard’s valuations today are still high, trading at 11x FY15F P/E vs its closest peer Nam Cheong at merely 4.3x. House lowered its TP to $0.51 (19% downside, from $0.57) based on a reduced 9x (from 10x) FY15F P/E to reflect the weak market conditions. While book value now provides a thin support, slowing order flow and oil prices, being no longer conducive for deepwater activity, pose visible headwinds over the year. With all-in costs in the US$40-80/bbl range, much of deepwater production now looks uneconomic with oil at c.US$50/bbl. Though this situation is temporary over 1H15, the slower upstream investments and order flows over this year may have a longer-term effect on Vard’s financials, delaying margin and earnings recoveries. Already, deepwater rig prices and charter rates are falling, together with those of their support vessels. Even in the best of times, Vard’s operating margins were c.11-14% - such a fall could eat into the bulk of future earnings. OSK DMG continues to see the risks on forecast revisions being more heavily weighted on the downside.