When worse comes to worst: Vard braces itself for a negative 3Q14 earnings loss

Risks increase as oil prices decline.

Vard initially saw a slower ramp-up at its Promar yard, but according to Maybank KE, its EBITDA-loss warning was still a shocker.

A negative 3Q14 EBITDA margin would be even worse than its worst quarter’s 4.1% in 2Q13, when Niteroi cost overruns first surfaced. 3Q14’s EBITDA loss was blamed on slower-than-expected throughput and productivity gains during Promar’s ramp-up in Brazil, additional costs incurred for two LPG vessels in Promar’s order book, and cost overruns for some European projects. 

Vard, however, does not see a need to take provisions for the NOK200m tax claim from the Brazilian authorities — a silver lining.

Here’s more from Maybank KE:

With declining oil prices worsening the deepwater market’s prospects, we also see increased risks for order intake, given Vard’s exposure to deepwater vessel construction. This is confirmed by Vard’s own less-optimistic outlook for its FY15-16E order wins. We cut our order intake for FY15E-16E from NOK12.8b pa to NOK9.1b.

We believe the loss in confidence would be a near-term overhang. Vard would need to show much stronger operational improvements over the next few quarters to regain investors’ confidence. 

Its unexpected negative EBITDA, after five sequential quarters of improvements, underscores its execution challenges. These could persist longer than anticipated. Given its now-high forecast risks, we ran through various scenarios under different EBITDA-margin assumptions.

Our base case continues to assume Promar will improve from 4Q14, though slower than initially expected. We forecast EBITDA margins of 6.2%, on par with 1Q-2Q14 levels. With our cut in order intake, revenue for FY16E is down 19%, diminishing its operating leverage. FY16E EBITDA margin is down to 6.0% from our earlier 10.4%.