- We maintain BUY on Alam Maritim Resources (Alam) with an unchanged fair value of RM2.05/share, pegged to an FY15F PE of 14x – at an 18% discount to the oil & gas sector’s 17x.

- Alam has entered into a subscription agreement to issue 123mil new shares (which represent 15% of the group’s share base) at RM1.35/share to Associated Land S/B (AL) and Caprice Capital Intl Ltd. This is likely to be completed by June this year. The shares are issued at an 18% discount to the last traded price.

- AL is an indirect subsidiary of Hong Leong Company (M) Bhd while the major shareholder of Caprice is Paul Poh Yang Hong, a former managing director of Hong Leong Management Co.

- The RM166mil placement proceeds will be used to pare down its debts by RM95mil and to partly finance the acquisition of a US$80mil (RM260mil) diving support ship (DSS) from a Singapore-based vessel operator. Hence, the group’s net gearing of 0.3x as at end-FY14F will be largely unchanged. The group plans to take a 51% equity stake in

the vessel with an equity-to-debt ratio of 30:70.

- The stake of SAR Ventures, controlled by Alam’s founders and managing director, will drop from 43.5% to 37.9% while Tabung Haji’s will drop from 10.4% to 9%.

- We understand that the DSS’ daily charter rate is US$80k-US$120k and the group expects to garner an utilisation rate of 75% based on the activities of underwater inspection, repair and maintenance (IRM) works.

- Assuming a daily charter rate of US$80k and a conservative utilisation rate of 25%, we estimate that the new vessel will easily offset the FY15F-FY16F EPS dilution from the new shares. But for FY14F, we expect a 9% EPS dilution because any revenue recognition from the vessel will only materialise in 4QFY14.

- With this DSS, the group hopes to secure a significant portion of Malaysia’s prospective IRM jobs, potentially worth RM1.8bil-RM2bil over 3 years. Recall that these activities were earlier awarded to Offshoreworks Group, which had since faced financial distress.

- Hence, this DSS is likely to be long-term EPS-accretive and underpins a strong likelihood of upgrades to consensus earnings over the next 1-2 years.

- Nevertheless, this development is not a surprise to us, as we had highlighted in our report on 18 Sept 2013 that Alam was looking at entering into a joint-venture to invest in 2 DSS.

- Additionally, the group is exploring other upstream activities such as jack-up rigs, which could introduce additional rerating catalysts. Valuations are compelling at an FY15F PE of 11x – 0.6x of the oil & gas sector’s 18x.

Source: AmeSecurities