Period  3Q13/9M13

Actual vs. Expectations ALAM reported 3Q13 core net earnings of RM21.7m which brought 9M13 core net profit to RM69.0m. This is above both our and market expectations; coming in at 84.2% and 83.5% of our (RM81.9m) and consensus (RM82.6m) full year expectations respectively. The variance to our earnings is due to the higherthan- expected JV earnings.

 Our full-year core net profit excludes a one-off vessel disposal gain of RM5.6m recognised in the previous quarter.

Dividends  No dividend was declared as expected.

Key Results Highlights QoQ, the core net profit was down by 13.5%, mainly due to significantly lower EBIT margins from the offshore marine services division which had a product mix of more third-party vessels (which yield lower margins compared to wholly-owned ones). This drop in EBIT was mitigated by the increases in ALAM’s associate earnings.

 YoY, as expected, 3Q13 posted a complete turnaround (+39.9%) from 2Q12 as: (i) the underwater services turned in a profit (versus EBIT loss of RM1.1m in 2Q12) and (ii) the associate and JV earnings saw marked improvements in margins and vessel utilisations. This is in-line with the trend featured by most domestic-centric OSV players.

Outlook  ALAM’s aim to secure a total of RM2.5b contract sum in 2013 could miss as the IRM contracts have yet to be awarded. To date, it has locked in RM1.3b worth of jobs, with later jobs likely to be work for its wholly-owned vessels of which around 4-5 are currently on spot.

 For its OIC business, ALAM is looking to either secure a portion of the upcoming Pan Malaysian Transportation and Installation project (to be awarded within the year), or at least work on subcontract works for the main incumbents, i.e. SKPETRO (OP; TP: RM5.81). We understand that there is fierce competition for the Package A could be announced in Dec or early 2014.

 ALAM does not rule out asset acquisitions via joint-venture for the inspection, repair and maintenance segment (i.e. diving support vessels) to enhance its chances for contract wins.

Change to Forecasts We are bumping our FY13 net estimates by 17.2% to account for: (i) lower EBIT margins for wholly-owned vessels given that there could be higher percentage of 3rd-party vessels in 4Q13, (ii) lower interest costs as we had initially been too aggressive, (iii) higher margins for the JV fleet and (iv) higher contract performance by the underwater division in the JV segment.

 For FY14, our net estimates increase by 1.7% largely due to the lower interest costs while other items remain unchanged. FY14 earnings will hinge on the company’s ability to win subcontract works from the T&I contract.

Rating Maintain OUTPERFORM

Valuation  Our target price increases marginally to RM1.94 (from RM1.91 due to the slight increase in our FY14 net profit projections) based on unchanged CY14 PER of 14x.

 Our ascribed PER is in line with the PER accorded to its competitor PERDANA (OP; RM2.40) and is justifiable given that it is still way below ALAM’s 2-year forward peak PER of 19.0x seen in 2007-2008.

Risks to Our Call  (i) Lower than expected OSV utilisation

 (ii) Further continuation of its sluggish underwater services division works.

Source: Kenanga