The recent quarter’s results for Vard appears to have shaken investor confidence in them. First, they issued a statement that results will be bad for the quarter and then they reported a net loss of NOK 44 million versus a profit of NOK 278 million for the previous year.
Digging deeper, they took an impairment charge NOK 70 million for the quarter due to the Brazilian problems so they are not profitable this quarter. However, without this impairment charge the quarter would be profitable. It seems quite drastic to write down the Niteroi goodwill to zero in one quarter, but it also makes sense to make use of this year to writeoff everything and pose for a recovery next year to manage investor expectations. The impairment charge is also non cash so it doesn’t affect cash flow.
Operations in other parts of the group remain sound, so I believe this is a temporary setback. They should consider taking less orders in Brazil until the yards are fully operational. By committing to orders and then outsourcing at expensive rates, they are not able to cover costs. It would be ideal if they can get more orders from Norway/Romania and Vietnam.
Looking at their order book, they still have 12 vessels in their order book for Brazil so it is unlikely for the group to do well since they are still committed to these low margin orders. While the management has given multiple assurances on Vard Niteroi turning around with the last subcontracting of the vessel hulls, it remains to be seen how long they will take to tackle the situation. Given their problems with Niteroi, it’s hard to say whether Vard Promar will suffer from the same problems.
Dividend payout ratio is expected to remain at 30%, so that would provide some support for the stock price. In the near term though, further weakness in stock price may be expected.
It will be great if there is a breakdown of P&L for the different operations, Brazil, Romania and Vietnam, but unfortunately we do not have the information. The management also seems to be very optimistic on the new book orders but so far we see that the total book orders are declining. If they do not replenish their book orders in H2 2013, the revenue projections may be further affected. I would wait for signs of higher profitability in the Brazilian operations and catalysts for new book orders before deciding to invest further.
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