Maintain SELL with a SGD0.47 TP (19% downside). We remain negative on the deepwater asset-construction space. Our main long-run concerns for the stock are its relatively high valuations, 200% net gearing, poor order win outlook, and the risk of delivery delays/cancellations.
■ A blast from the past
Vard secured its first contract this year for one diving support and construction vessel for Singapore-based Kreuz Subsea, which we view as a high-quality customer. Investors may recall that Kreuz Subsea was one of our preferred picks in 2013 before it was privatised by a private equity fund in Feb 2014. This 105-men, DP2 class vessel will be of VARD 3 17 design with a total length of 91.2 metres and is scheduled for delivery from Norway in 2Q17 (estimated NOK700m value). It will have a 100-tonne active heave-compensated offshore crane, a 12-man diving bell system, and is prepared for remotelyoperated vehicles.
■ Vard’s first shallow-water offshore support vessel (OSV)
From the specifications, this vessel appears to be customised for shallow-water work, supporting our view that the deepwater space continues to face a dearth of orders. Fundamentally, oil prices at c.USD63/barrel (bbl) are supportive of shallow-water operations, but deepwater fields may appear uneconomic for oil majors to develop. We have mixed views on Vard’s entry into building a high-specification shallow-water OSV – it is a move away from its core competencies in high-specification deepwater vessels, but it does provide cash flow visibility further into FY17 when yard utilisations are expected to fall, given the dramatically-slower order win momentum.
■ Maintain SELL and SGD0.47 TP
Vard’s current valuations are rich with its P/E and EV/EBITDA multiples more than double its peers’. Although we recognise that most of its borrowings are secured by vessels under construction, the fact remains that the debt will remain on Vard’s books if customers delay deliveries or cancel contracts. Macroeconomic headwinds are likely to persist with the oversupply of large anchor handling tug supply (AHTS) vessels and platform supply vessels (PSVs). Maintain SELL with a SGD0.47 TP, based on 0.7x FY15F P/BV. Key upside risks would be higher-than-expected order wins and/or margins. (Read Report)