Vard’s Brazilian Woes

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.┬áThe 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.


For further information, you may be interested in:

Vard Investor Relations Q&A with Private Investor

STX OSV General Offer Ends

Ernst & Young Report Recommends STX OSV Shareholders to Reject $1.22 Offer

STX OSV FY 2012 Results

Reject STX OSV Offer At $1.22

8 Comments on Vard’s Brazilian Woes

  1. Hi Calvin, I agreed with you. Maybe we were too confident after the failed takeover that the company will go back to her heydays of S$1.8plus.

    At 0.79 cents as of Friday market close now, it is trading at it IPO price. Feel like averaging down but It is a scary thought as management keep assuring investors but I heard that they were hesitant and avoid questions during the teleconference.

    My feeling is that the shorties will continue to depress the price until contracts are secured/Gd news in Brazil or BBs decided to come in. Til now, there are no sign of any Petronas contract (Sigh) and your post have indeed highlight a bleak future for Vard with the lack of new order books

    Do you have any cut loss price or are you intending to hold on even if it drop below $0.7? (Seem possible) It does look like a thrill ride for the past few months- From 1.25 all the way to 0.79.

    • Hi lincoln, one of my concerns is that if the new contracts keep coming from Petrobas, their Brazilian yards will still not be profitable. I rather see more book orders from European side as that’s the division that’s profitable. I am staying neutral for now, if the price does recover, I may trim the holdings a bit. But it all depends on the situation.

  2. Hi, will the consistent drop in price should one just sell it and just stop loss?


    • Hi TL, the drop in price is relation to the current quarter’s report, looks like it has stabilized somewhat. What’s gonna continue to affect the price will have to depend on the Q3 report and whether they win any book orders.

  3. Hi Calvin,

    So for holders, should we cut loss or hold? I believe a lot of us are suffering from very heavy paper losses already :(

    • Hi Vic, unfortunately that’s a decision you will have to make. It should always be in relation to the portfolio as a whole, if you did it correctly, this one stock should not be a significant portion of your portfolio. It is considered a high risk stock, so price volatility should be expected. So even if you sell it at a loss, it should not have too big an impact on your portfolio.

  4. hi Calvin, how do u compare Vard against Nam Cheong, another OSV operator? Thx…

    • Hi Mhaha, Vard and Nam Cheong are both OSV builders, not operators. I haven’t really looked at Nam Cheong much as Vard seemed much cheaper in comparison to the other O&G counters. Vard was more of a value buy, if it wasn’t trading at such a low P/E, I wouldn’t be looking at it. Of course at this point Nam Cheong would look cheaper due to Vard’s deteriorating fundamentals.

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