Volatile North Sea deals put Vard’s stellar profits at risk

Is Vard on troubled waters?

The past two quarters has been stellar for Vard Holdings. It clinched contracts worth a total of NOK8.2b, which puts the group in a solid position to exceed various profit estimates.

But according to OCBC, Vard remains at risk from the volatile North Sea market, where some of its biggest customers are based.

“Our revised forecast is premised on a still robust outlook on the OSV and subsea sectors, including the Arctic regions, of which Vard has a strong competitive advantage. However, there are also downside risks,
as some of VARD’s key customers such as DOF ASA, Solstad and Siem Offshore had recently described the North Sea spot market as volatile, especially for the AHTS segment,” the report noted.

Here’s more from OCBC:

Following Vard Holdings Limited’s (VARD) buoyant new orders intake of NOK5.5b in 1Q14 (39% of FY13’s total order wins) which boosted its order book to NOK21.8b (as at 31 Mar 2014), the group has followed up by securing another NOK2.7b of contracts in 2Q14, based on our estimates.

This has further enhanced VARD’s revenue visibility from 2014 to 2016. We believe VARD is now in a solid position to exceed our FY14 order wins estimate of NOK11.5b.

We now forecast VARD to clinch NOK13b worth of contracts each in FY14 and FY15. Correspondingly, we raise our FY14 and FY15 PATMI projections by 0.7% and 6.4%, respectively.

Although we raise our valuation target PER peg from 9x to 10x blended FY14/15F EPS to reflect VARD’s improved earnings visibility and consequently bump up our fair value estimate from S$0.97 to S$1.12, we believe the market has already priced in VARD’s recovery prospects and orders momentum.