- We maintain BUY on Alam Maritim Resources (Alam) but with a lower fair value of RM1.80/share (vs. RM2.05/share previously), pegged to an FY15F PE of 16x – on a 20% discount to the sector’s 20x.

- We have cut Alam’s FY14F-FY16F net profits by 22%-25% on a reduction in vessel utilisation assumptions from 90%-80% and margins by 2%-points as 1HFY14 earnings of RM36mil came in below expectations, accounting for 34% of our FY14F estimate of RM108mil and 38% of street estimate of RM97mil.

- YoY, the group’s 1HFY14 revenue slid by 4% to RM161mil, largely due to:- (i) lower vessel utilisation rate at 79% (vs. 85% in 1HFY13) as 5 vessels were undergoing minor maintenance for 5-30 days; partly offset by a 70% increase in offshore installation & commissioning (OIC), and subsea revenue recognition. Hence, net profit had contracted by 28% YoY.

- But in 2QFY14, Alam’s net profit rose by 57% QoQ largely due higher OIC and subsea progress billings, with vessel utilisation remaining low. Despite the low utilisation, 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 year.

- For comparison, the OIC/subsea segment registered an EBIT of RM9mil in 2QFY14 vs. RM2mil in 1QFY14. 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.

- With the introduction of Wah Seong as a 49% equity partner in 5 of Alam’s existing OSVs, we expect the group to enhance and expand its tendering capabilities for major engineering, procurement, construction, installation and commissioning (EPCIC) works by complementing Wah Seong’s pipe-coating and gas-compression activities with Alam’s offshore construction and marine divisions.

- Eyeing to acquire a 51% equity stake in an US$80mil diving support vessel (DSS), Alam 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 EPS-accretive 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 tie-ups with TH Heavy Engineering, Scomi Energy, and SGX-listed Ezion Holdings.

- Valuations remain compelling at an FY15F PE of 13x, compared to the oil & gas sector’s 20x.

Source: AmeSecurities