Vard (formerly: STX OSV)

[Clement]

Hi KopiKat,

I am interested in Vard too. I run some simplistic tests:

1) Vard has a total of 375 million USD loan of the ship building projects in that ill-fated brazil yard.

2) 2012 Revenue is about 1.5 billion USD for 2012 in Norway alone. Assume that have that in 2013 (Vessals to be delievered in 2013 is higher than 2012, and discounting for brazil )and net margin become a low 5%, NP for 2013 is 75 million

1/3 given out as dividend =25/1180
=2.1 cents (still ok if you buy into recovery story, 2.3 yield as you wait...)

2012 dividend= 14 cents,2011 dividends= 8 cents. IF you value the price of vard using yield and impose worst case scenario, the 20% drop in price might not actually be excessive.

However, if that decide to throw in towel and decide to impair all the projects and hence the loans in 2013 (hypothetical worst case scenario )

1) they will make a loss of 300 million

and equity is only 557 million, so more than half of value wipe out although brazil just make up about 15% of revenue.
Scary...

NOt accounting trained, gladly accept any mistakes pointed out for learning purposes.

(Not vested, but finger getting itchy too)

wow, your analysis seems a little too conservative.
NP of NOK75m seems really low compared to consensus (which i wouldnt say is correct either).

To impair the entire loan portfolio seems excessive too. On theory, when they deliver the boats (delay but still delivered), they will still get paid so no impairments. Right now, what Vard seems to be saying is that those ships from the Brazil yard should barely breakeven, and would have to incur additional costs for project delays (hence a loss). Hence, I thought that instead of taking a NOK375m impairment, its more likely to be a %age of contract value?
I dont have any of these numbers with me...

Im vested, stuck since long ago (should have practiced cut loss).
But i thought that post-earnings would be a better time to pick up.
If the management wants to earnings manage (i.e. write off everything as much as possible in this quarter), the next few quarters should improve.
if the Italians discovered something that the Koreans didnt tell them before hand, the would probably want to write off this quarter. So i thought this quarter results might look bad.
On the brighter note, this is a profit guidance, not a profit warning that earnings would be significantly lower than a year ago.

Side note: realised this upcoming earnings is released much earlier than last time + no teleconference.

That's what I thought too, part of the warned depressed margins might be due to management choosing to recognize "foreseeable losses" on the Brazilian contracts in q2. It is to be expected that STX would not have recognized them as they were trying to sell the company. But this is all speculation, we will only know when the results are released.

[Clement]

Hi, thanks for the reply Bluekelah. As to the overcapacity problems in Asia, this can be seen in the low utilisation rate in Vard's Vietnam yard. Brazil's offshore market has a local content requirement therefore Vard's competitors in that space are mainly other Brazilian yards.

So in short, asia segment bad, europe segment is good and brazil new segment is hard to predict.

So value wise where is the value now? Can someone enlighten?

Sounds like investors are now buying or holding Vard based on "the next emerging market growth" sentiment?

Found some time to run through some numbers. Given the uncertainties around it's future earnings visibility, i decided to use past data to do a rough evaluation of Vard. This is just a crude glance, forgive me if i miss anything of importance.

Taking trailing twelve month numbers, Vard has a sales per share of NOK9.37 or SGD1.95. Putting P/S at 0.46. Taking average past four year numbers, Vard has sales per share of about $2.08. The average PAT margin for the past 4 years is 7.7%, which includes 2009 where Vard only made profits after taxes of NOK95 million on revenues of NOK11,895 million.

Taking ttm revenues as a proxy for average activity levels and average past 4 year PAT margins as a proxy for profitability over a cycle, i get a rough P/E of 0.46 x 100/7.7 which is around 6. Of course it will be miraculous if Vard can acheive such profitability in FY2013, but if they can solve their issues in Brazil, i don't see why this cannot be considered a value play.

[safetyfirst]

It is interesting to note that many buddies are interested in this company. For me, this is clearly out of my circle of competence. Too tough, too difficult

[KopiKat]

Altho' Vard is in a cyclical industry, they do have an order book visibility (NOK15.45Bil as of Q113). What this means (to me) is some stability in Revenue eg. for FY10 to FY12, it was rather flat. However, the cyclical aspect will most likely affect their profit margins. I looked at the past 3 years,

[Image: 2j5ng9j.jpg]

After looking at their figures and forward statements, I was hoping Q412 to have been a bottom, with Q113 being the start of an upcycle. However, with the latest Profit Guidance, due to the Brazil operations, we'll most likely not see a better NPM for the coming Q213. IMO, an NPM = 7.7% for FY13 would be on the optimistic side. Most likely, it's going to end up on the wrong side of 5%....

PS. Vard is also in an industry that's outside my circle of competence... I'm just looking at numbers plus picking up OSV knowledge on the go... Rather educational and interesting...

[Clement]

Hi, It would be miraculous if margins are above 7% for the year. I was just looking for a proxy for margins without the Brazilian mess. The 7.7% was just used as a proxy for full cycle profitability. I think we should watch operating cash flows/revenues going forward. It might provide hints as to any margin recovery.

[Greenrookie]

Altho' Vard is in a cyclical industry, they do have an order book visibility (NOK15.45Bil as of Q113). What this means (to me) is some stability in Revenue eg. for FY10 to FY12, it was rather flat. However, the cyclical aspect will most likely affect their profit margins. I looked at the past 3 years,

[Image: 2j5ng9j.jpg]

After looking at their figures and forward statements, I was hoping Q412 to have been a bottom, with Q113 being the start of an upcycle. However, with the latest Profit Guidance, due to the Brazil operations, we'll most likely not see a better NPM for the coming Q213. IMO, an NPM = 7.7% for FY13 would be on the optimistic side. Most likely, it's going to end up on the wrong side of 5%....

PS. Vard is also in an industry that's outside my circle of competence... I'm just looking at numbers plus picking up OSV knowledge on the go... Rather educational and interesting...

Any ideas among the various vessels Vard are building, which ones are the high margin ones?

[Clement]

The offshore subsea construction vessels are probably the most expensive. Margins are more about project management and execution so I guess it's difficult to say.

[l0nEr]

Vard is the most premium of the OSVs, which is why they had been able to command a premium.

hmm.. im not sure why, but analysts and the management seems to be evaluating the company based on EBITDA, as compared to net profit. I thought it is probably because as a industrial, its better evaluated at an EV/EBITDA basis. PB doesnt work well because the company paid too much dividends out shrinking the equity (same case as Starhub), which is why the ROE is always in the mid-to-high-teens.

In a good year, which was in 2011, the EBITDA margins were very high (around 19%). But it gradually slipped as the lower margins contracts were recognised, so it came to around 11%, which is where the management and analysts guided it to be. Note that as the OSVs are already contracted, the margins are kinda "fixed" too, unless unexpected events happen. Note that although the company has a lot of debt, if im not wrong it is on a net debt position as debt is mostly project-based.
Now with the situation in Brazil, the company is expecting a loss in Brazil, which will affect the overall margins. Which is why analysts are slashing EBITDA margin estimates to probably around 8% for the year. Note that a EBITDA margin cut from 11% to 8%, means the earnings will probably go down by 30%, and hence to maintain the PE or the EV/EBITDA, stock prices will go down around 30% too?
I dont know if this was guided by the management, Citi expects the Brazil conditions to improve only in Q4 2014 when the existing contracted OSVs are delivered. We will probably only know the impact in Q2 earnings, or when the management discusses it.

Personally, i thought the whole thing feels weird.
1. Singapore analysts dont disclose Quarterly forecasts (lazy or what i dont know), but Bloomberg doesnt seem to show. i wondered why they specifically said Q2 consensus estimates were too high.
2. A quick check in Q1 presentation shows that only 2 out of 22 ships were delivered from Brazil yard, and only 2 out of 24 ships in 2013 is expected to come from Brazilian yard. Assuming that the ships in the other yards can maintain the FY2012 margins of 13.2%... If the ships were from Brazilian yards generate 0% EBITDA margin, EBITDA margins should shrink from 13.2% in FY2012 to 12.10% in FY2013. If the ships were from Brazilian yards generate -10% EBITDA margin, EBITDA margins should shrink from 13.2% in FY2012 to 11.27% in FY2013. The 2 Brazilian ships need to make -50% EBITDA margin for the overall EBITDA margin to fall to 8%.
Of course this is a simplistic view as there are also higher administrative costs from the merger, 2nd brazilian yard start up costs, and also the assumption that the Norway yard can make 13.2% EBITDA margin.

[Clement]

Hi Loner, care to post where you got those figures on point 2? I'll try to make some sense out of them.
To further address your post, book value multiples can imply future earnings expectations. In theory, if roe exceeds required returns on equity, price is expected to exceed book value. Ev multiples can also be similarly justified comparing fcff to wacc. Margins are not exactly locked in when contracts are signed. Only price is locked in unless it's a cost plus contract. In this case, the entire Brazilian shipbuilding industry is suffering from delays and cost overruns due to demand/supply of subcontractors and other personnel.
My gut feel guess is that Stx probably signed many orders at low margins to dress up the order book for the sale. This might also explain the low transaction price relative to market price at that time. Now, the accounting standards for long lived contracts requires management to recognize all foreseeable losses on the contracts. Based on the language of the profit warning, I am suspecting that this is the case.

[KopiKat]

Reading Materials

IPO Prospectus
AR2012
OSV May 2013 Newbuilding Activity Report
The Platou Report 2013
Vard website

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So, what the heck are OSVs?? It stands for 'Our Savings Vapourised'.... if we were unlucky to buy at >$1.5x to see it drop to $1.2x when Fincantieri lasunched their mandatory G.O. at $1.22 and the current drop to ~$0.90.... Ok, seriously, it stands for 'Offshore Support Vessels'. From their website / AR2012 / IPO Prospectus,

1. ANCHOR-HANDLING TUG SUPPLY VESSELS (AHTS)

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We design and build technologically advanced anchor handling Tug supply vessels (AHTS) that are capable of operations in the harshest environments. AHTS vessels mainly perform anchor handling duties and towage of offshore drilling units and floating production units. as AHTS vessels generally have free deck area, and some of them have tanks under deck, they can also supply cargo and bulk. Due to their large and heavy duty deck area, the AHTSs vessels can be used to transport
large chains, anchors and other equipment. some AHTS vessels are equipped with additional equipment such as launch and recovery systems for remote operated Vehicles (ROV), and cranes for light construction work. additionally, if equipped for, AHTS vessels can do firefighting, rescue operations and oil recovery.


2. PLATFORM SUPPLY VESSEL (PSV)

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We design and build a complete range of platform supply Vessels (PSV). PSVs are commonly referred to as the “trucks of the sea”, as they are designed to transport cargo to and from offshore oil rigs and platforms. PSVs are able to perform a variety of tasks to support offshore operations; our PSVs are designed with focus on cargo-carrying capacity and excellent maneuvering capabilities combined with low fuel consumption. The design allows for flexible configuration with respect to
liquid and bulk cargo. equally important to loading capacity and maneuverability are crew comfort, low noise levels and safe working environments. our designers have optimized the PSV Clean Design-hulls to a maximum cargo capacity-todeadweight ratio.


3. OFFSHORE SUBSEA CONSTRUCTION VESSELS (OSCV)

[Image: segment-oscv.jpg]

We design and build highly advanced offshore subsea Construction Vessels (OSCV) for the oil and gas industry. These highly complex vessels perform subsea operations and maintenance work, and include pipelaying vessels, subsea construction vessels, diving support vessels, ROV support vessels, well intervention vessels, as well as ice-classed offshore vessels designed to operate in arctic areas.


4. OTHER SPECIALIZED VESSELS

[Image: segment-ibsv.jpg]

We also design and build other special vessels like research and coast guard vessels, special purpose cable layers, seismic vessels, fishing vessels like stern trawlers, forrage carriers, icebreakers, as well as conventional and LNG-powered car and passenger ferries. We deliver different types of vessels and ship designs of both standardized and highly advanced vessels with significant customer-specific adaptations.

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How is the business cycle linked to the O&G (Oil & Gas) Industry? From IPO Prospectus pg95,

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