Why Vard may have suffered big time from Brazil's tight business climate

Its EBITDA margin dropped to 4.1%.

According to OCBC Investment Research, the business environment in Brazil remains very difficult, characterized by high personnel turnover and tightness in the subcontracting market. The outsourcing of a hull construction worsened the already overloaded situation in Niteroi.

This resulted in further delays and cost overruns. Although the group had implemented several mitigating measures, further deterioration in the future cannot be ruled out. At its new Promar yard, pre-operational expenses and start-up costs were higher than expected and had to be revised upwards.

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Vard Holdings Limited (VARD)’s 2Q13 results came in below ours and the street’s expectations, despite issuing a profit warning earlier. The group reported a net loss of NOK20m for 2Q, bringing its 1H13 net profit to NOK168m – just 28% and 23% of ours and the consensus FY13F estimate.

EBITDA margin fell to 4.1% in 2Q13 from 13.8% in the year-ago period. The poor performance was mainly due to operational challenges in its Niteroi and Promar yards in Brazil. 

In terms of order-book development in 2Q, VARD secured three new contracts (1 OSV, 1 PSV and 1 Offshore Tug) and delivered 8 vessels (1 AHTS, 5 PSVs, 1 OSCV and 1 Forrage Carrier). Consequently, net orderbook fell 11% to NOK14.0b as of end-2Q13 (1Q13: NOK15.5b). Looking into 2H13, management is confident about the prospects for new orders.