2016 looking at a turnaround

Our overly cautious view on the joint venture and associate forecasts previously have significantly resulted in our forecasts missing 9M16 reported numbers as we imputed wider losses of RM38.3m. However, we now expect 2016 to turnaround with a full year profit of RM2m, while FY17-18E is estimated to profit at RM8.6m and RM19.6m respectively. Despite earnings upgrade, we downgrade ALAM to SELL with TP reduced to RM0.19 based on lowered 0.2x rolled forward 2017E P/BV.

3Q16 result beats expectation

ALAM remain in the black for second consecutive quarters which saw 3Q16 posted core net profit of RM5.7m. This is after adjusting for RM7.9m forex loss. Core net losses for 9M16 narrowed to RM2.2m against our earlier estimate of expecting a loss of RM41.5m. Earning misses were mainly due to our: 1) higher share of JV and associates losses, 2) worst-off margins assumptions.

Results analysis

9M16 core losses narrowed to RM2.2m after posting two consecutive quarters of core profit vs. core net profit of RM13.2m in 9M15. Revenue weakened 20.3% while EBITDA margin fell 3ppts to 19.7%. Overall business continues to be impacted by lower vessels utilisation as well as lower subsea activities. Meanwhile, challenging OSV environment continues to put a strain on ALAM’s operating cash flow which posted negative RM27.1m.

Earnings revision

We now assume FY16E to close at RM2m reflecting our revised view on better segmental margins as well as assumptions that joint venture contributions would turnaround from losses in FY16. We expect OSV utilisation to average around 50-60% for the next 3 years.

OSV market to remain challenging

We lower our target P/BV multiple to 0.2x (from 0.4x previously) and target price to RM0.19 as we roll forward our valuation year. Despite the earnings upgrade, we believe operationally ALAM will continue to face challenges given the current OSV market environment. Downgrade to SELL

Source: Affin Hwang Research - 28 Nov 2016