Friday, September 26, 2014

Vard falls 23% since profit guidance due to pending tax claim - Is it justifable?

First, I declared no vested interest.

I think there are 2 issues here.

Tax claim of 200 mio NOK.

Assuming provision need to make, and is already made in 2014 1H. 1H will be gone, if 2H is similar to 1H, EPS of 5cents means an PE of 17.

It is not cheap. In fact, if you believe on peer valuation of around 12 for OSV company, it stand to fall further to 60 cents?

I however, still feel that market overreacted.

Why? Lets look at the graph:

The fall in price is almost similar, what happen in July 2013. That is when the troubles at Brazil's Vard Niteró starts, the delays in delivery lead to provisions and collapse of Margins.

Tax claim is one-off.

What happen at Nitero is a operating issue. The tax issue and Nitero should not have the same impact.

How much provision has Vard made in 2103? 1004 mio, with 567 mio still not utilized. In 2012, it made 393 mio provision.

Since 2014, Vard Promar , another Vard in Brazil, become operational, at Q2, only the gantry cranes is left.
Vard Nitero delivered 2 of the 4 delayed vessels. Although the 2 remaining vessels further delayed, the provision provided for in 2013, should cover it, with insignificant provision to be made in 2014.

It is still an issue, and of course, we do not know if the 4 vessels are the last of it. But, there is reduced outsourcing, EP02 is the last of outsourced hull, and they are scaling down activities. In Q1, it is stated " There is still a high workload at the Niterói yard, but reduced from the peak in fourth quarter 2013". In the latest Q2, Brazil has an order book of 14 vessels, 2 of which will be the cursed remaining 2 vessels, 8 will be LPG carriers that are contracted to Promar, anymore vessels orders at Niteroi, is minimum. It seems Niteroi will serve as a support Yard, with Promar employee count ramped up.

So if anyone is thinking of double whammy to justify the lastest fall, it is rather unlikely. The tax claim is pending appeal. The provision is small compared to Niteroi issue, and Niteroi has seem much progress.

Now back to the graph. What happen to the stock from January?

The impressive order wins, which brought orderbook to five year high.

Orderbook is still intact, margins has improved from the 2H of 2013, and provisions were already made.

If we stripped out all the "distractions", Vard is actually trading at 2103 PE of around 7.4

See calculation of 7.4 at valuebuddies. (Look at Clement and GPD comments)

Violia, from overpriced at 16 PE, it became undervalued at sub 8

And the best part, the calculation is made before the "Singapore sale", it is about 6 now.

Valuation is an art, isn't it?

Why I am still not vested then?

1) Conserving cash.

2) Business model of taking loans to build vessels to be repaid by customers after completion is fundamentally risky. When customer refused to pay, the industry is in trouble usually, and the vessel is not easy to find buyer. If all goes well, all is fine, but such loan terms put the risk on Vard.

3) I buy for dividends, assume 2014/2015 will be better with EPS of around 12-14 cents. Dividends will by 4-5 cents (min 30 % payout), decent, but not particularly outstanding, taking into account 2) which dim the longer term picture of the company. e.g. beyond 2016.

4) But if free fall continue, even the dog will have its day...

5) Maybe 70 cents? LOL


  1. Hopefully this news will give Vard's share price a boost:

  2. Hi betta man,

    I thought Vard already rebounded rather strongly in recent days...

    Are you vested?

    1. Yes I am.

      But the above news was published on SGX after trading hours on 3 Oct. So hopefully Vard will re-bound more strongly come 7 Oct.

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