Vard Holdings Limited - MANAGEMENT REPLY: Will the Brazilian tax authorities strike again?

Vard is facing multiple problems in Brazil. It is facing high employee turnover at one of its yard and also may have to pay for claims made by the tax authorities.

7/10/2014 – Maybank Research has reiterated its BUY rating on Vard Holdings but lowered its target price by ten cents to S$1.15.

It has cut its FY14 to FY16 earning per share by 5% to 10% for lower orders and margins.

Analyst says the weakness in price is due to lower oil prices and a lack of new orders.

The other culprits are a retrospective tax claim in Brazil, and fears of a longer than expected gestation period at its new Promar yard.

OCBC Research would like see how these uncertainties unfold in future.

Hence, it has maintained its HOLD rating and lowered its target price to S$0.94 from S$1.12, based on a lower price-to-earnings multiple of 9 times instead of 10 times.

It has also cut profit estimates by 4.8% for FY14 and 7.5% for FY15, to account for cost pressures in Brazil.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Will the Brazilian tax authorities strike again?

On August 5, Vard was slapped with a NOK200 mln tax claim by the Brazilian authorities.

The claim relates to the transfer pricing of goods and services delivered from its Norwegian entities to its Niteroi yard in Brazil in 2010.

Vard intends to defend its case, but may make a provision in 3Q FY14.

The tax amounts to NOK0.17 or S$0.035 a share, which seems to be reflected in its 6.5% price dip from S$1.08 to S$1.015 after the announcement.

Maybank Research fears that there could be additional claims for 2011 and 2012, as Brazil aligned its conflicting tax rules only in 2013.

According to Vard, it made the most transfers in 2010.

Therefore, any tax claims for 2011 and 2012 should not exceed NOK200 mln for each year.

In the worst case, the analyst estimates its write-offs at SGD0.105/share in total for those three years.

Question

2. What are the chances it will win the case against the Brazilian tax authorities?

Vard will an appeal against the ruling, and no payments are expected to be made before a conclusion of the case, which may take several years.

The company says it has previously not made any provisions because its lawyers and tax consultants have deemed an unfavorable assessment highly unlikely.

(Read the full story to get all 5 questions)

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