Vard

Vard: The Norwegian yard operator managed to eke out a 2Q15 net profit turnaround to NOK58m (-58.6% y/y) from a NOK92m loss in 1Q15. However, its 1H15 net loss of NOK34m is still a long shot from full year consensus forecast of NOK275.3m profit.

For the quarter, revenue shrank 15.4% to NOK2.5b owing to reduced activity at its European and Brazilian yards. In total, four vessels were delivered from Vard’s shipyards in 2Q15, with one vessel from each of its yards, excluding Vard Promar (Brazil) which is still seeing delays in vessel delivery.

Six more vessels are expected to be delivered in 2015. This implies that recovery in revenue figures might not be seen until FY16 or later.

EBITDA margin compressed further by 4.6 ppts to barely breakeven at 1.8%, reflecting weaker execution and continued losses at its Promar yard in Brazil, as well as higher staff expenses (+4.6% y/y). The group also incurred a restructuring cost of NOK14m for termination benefits and payments as it downsizes its workforce due to lower yard utilisation.

Consequently, it bled NOK21m at the operating level, in stark contrast to operating profits of NOK140m in 2Q14 and NOK9m in 1Q15.

Earnings were further crimped by ballooning finance costs of NOK60m as its net gearing soared to an alarming 222% from 188% at the start of the year. Together with negative cash flows of NOK481m, the group’s financial position appears to be untenable.

The yard is also awaiting an appeal decision on its Brazilian tax liability of ~NOK200m, for which no provisions have been made.

With only a solitary contract win (1 OSCV worth NOK1.2b) in 2Q15, outstanding order book was depleted to NOK13.9b from NOK15.6b as at end 2014.

Management maintains a bleak outlook on the offshore oil and gas sector as orders in the North Sea peters out. With a diminishing order intake, the group expects the trend of lower utilisation rates at its yards to accelerate in 2H15 and into 2016.

At its current market price, Vard is trading at 0.78x P/B. The street has 2 Hold and 8 Sell calls on the counter with a consensus TP of $0.46.