- We maintain BUY on Alam Maritim Resources (Alam) with an unchanged fair value of RM2.05/share, pegged to an FY14F PE of 16x – on parity to the oil & gas sector.

- We maintain Alam’s FY14F-FY16F net profits on expectation of a stronger 2HFY14 as 1QFY14’s RM16mil earnings accounted for 14% of our FY14F estimates of RM108mil and 15% of street estimates of RM101mil. Hence, we view the results to be within our expectations.

- In 1QFY14, Alam’s net profit surged by 2.4x QoQ largely due to RM15mil in legal provisions sustained in 4QFY13, comprising:- (i) a RM8mil loss to the Inland Revenue for withholding tax arising from the chartering of a vessel from a third party in Singapore; and (ii) RM7mil loss for a law suit due to disputes on the termination of another third-party charter.

- YoY, the group’s 1QFY14 revenue declined by 15% to RM79mil, largely due to:- (i) lower vessel utilisation rates of 80% (from 85% in 1QFY13) as two anchor handling tug supply vessels were drydocked for maintenance; and (ii) lower offshore installation & commissioning (OIC), and subsea revenue recognition. Hence, net profit had contracted by 30% YoY.

- We expect a pick-up in earnings momentum in the OIC division in 2HFY14 following the RM248mil transport and installation contract secured with MMHE and Technip earlier this month. As a comparison, the OIC/subsea segment registered an EBIT of RM2mil in 1QFY14 vs. RM6mil in 1QFY13. Separately, the group also secured charter extensions worth RM71mil for a straight supply vessel starting in Sept 2014 and four utility tugs/vessels in October 2014.

- We remain positive on Alam’s expected acquisition of a 51% stake in a US$80mil diving support vessel (DSS), which could garner daily charter rates of US$80k-US$120k. Expected to secure utilisation rate of 75%, the DSS will be employed to support the group’s underwater inspection, repair and maintenance (IRM) works.

- The group hopes to secure a significant portion of Malaysia’s prospective IRM jobs, potentially worth RM1.8bil-RM2bil over three years. Hence, this DSS is likely to be long-term EPSaccretive and underpins a strong likelihood of upgrades to consensus earnings over the next 1-2 years.

- Additionally, the group is exploring other upstream activities such as jack-up rigs, which could introduce additional re-rating catalysts. The entry of Hong Leong Co and Caprice Capital with a 15% equity stake in Alam could mean corporate and project tieups with TH Heavy Engineering, Scomi Energy, and SGX-listed Ezion Holdings, which own and operate a fleet of self-propelled jack-up liftboats. Valuations remain compelling at an FY15F PE of 11x, compared to the oil & gas sector’s 18x. 

Source: AmeSecurities