VARD eyes US$530m Brazilian orders

Target wins to ignite an uptick in its share price.

According to CIMB, it believes that the lacklustre share price of STX OSV, which has adopted a new brand name, VARD, could be catalysed by sizeable Brazilian orders worth up to US$530m or NOK3bn (translating to 27% of our FY13 order target) in the next couple of weeks.  

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Given its recent underperformance and sentiment uplift from this headline-win, we upgrade VARD to Trading Buy from Neutral. The stock is not an Outperform as there could be downside risks to the company’slonger-term margins profile. Further, the absence of communications fromthe new majority owner, Fincantieri, could put off longer-term investors. 

No change to our EPS or target price, still at 8x CY14 P/E, one s.d. above its trading mean.

Industry publications report that Petrobras could award contracts for seven newbuild pipe-laying support vessels (PLSVs) in the next few weeks. One source pinpointed 20 April as the cut-off date for announcement.

Accordingly, two 300-tonne PLSVs could be contracted to TechnipNorskan, with construction eyed at VARD’s new Brazilian yard, Promar.

Yard prices for the two units could total US$560m, or NOK3bn, translating to 27% of our FY13 order target of NOK11bn. Deliveries are expected by late-2016.

We think that the looming-win could spark an uptick in share price. YTD, VARD has secured orders of NOK2.4bn (all for subsea vessels). Beyond the headline-win, we highlight that while the Petrobras orders would replenish the order book, they would not contribute meaningfully to 2013’s revenue runrate due to its long delivery.

From a margins perspective, the yard pricesfor the Brazil units are expected to be higher than for international-built units with higher tonne tension capacities. This should buffer costs escalations and production bottlenecks in Brazil. 

With the stock a laggard, we recommend that shorter-term/riskon investors buy before the fact. Also, with the share price at S$1.22 (the offer price), near-term downside risk is limited.

It was only recently that the market unanimously decided that the offer price undervalued VARD. Fincantieri only managed to
accumulate another 4.9% of shareholdings from the open market.