Period  4Q13/FY13

Actual vs. Expectations The 4Q13 core net earnings of RM21.6m brought FY13 core net profit to RM90.6m. This is within our full-year forecast (RM93.6m) and consensus estimate (RM90.3m), at 96% and 99% fulfilment rates, respectively.

 The estimated core FY13 net profit excludes: (i) a guided one-off cost due to contingent liabilities from an arbitration proceeding and withholding tax expense for previous taxation case of c.RM15-17m booked in 4Q13 and (ii) a one-off vessel disposal gain of RM5.6m recognised in 2Q13.

Dividends  No dividend was declared as expected.

Key Results Highlights QoQ, despite revenue dipping 52.2% as the underwater division hardly had any income in 4Q13, the core net profit was flat (-0.3%) as ALAM’s wholly-owned vessels booked in a better margin of 13.3% (versus 5.4% in 3Q13). We understand that the lower margins in 3Q13 were due to product mix of more third party vessels (which yield lower margins compared to wholly owned ones). This also helped to mitigate the poor sequential performance by the underwater division.

 YoY, 4Q13 net profit was up 12.1% largely due to the better utilisation for ALAM’s vessels given the uptick in the demand for OSVs this year. This is in-line with the trend featured by most domestic-centric OSV players.

Outlook  ALAM guided no more OSV vessel additions going ahead; instead, it will focus on securing third-party OSV charters, Inspection, Repair and Maintenance (IRM) and pipe-laying.

 To enhance its chances for IRM wins, ALAM does not rule out asset acquisitions via joint-venture (i.e. diving support vessels). This could enhance its EBIT margins given that they are currently chartering such DSVs from third-party for any existing jobs.

 For the pipelay barge 1MAS, ALAM is targeting subcontract works for the Pan Malaysia T&I contracts.

Change to Forecasts Whilst the FY13 net profit was within expectations, we are slightly concerned by the volatility of the pipelay barge prospects, and given there has been no work secured to date for it, we have opted to fine-tune our FY14 forecasts. Currently we expect: (i)85% utilisation for its wholly-owned vessels, (ii) 90% utilisation for JV and associate vessels (excluding the barges which we expect 100% utilisation), (iii) RM150m underwater division revenue, and (iv) RM6.3m pipelay barge JV earnings. Our revisions result in a 10.2% downgrade to FY14 net profit.

 We introduce our FY15 net profit of RM111.7m that features: (i) 87% utilisation for its wholly-owned vessels, (ii) 92% utilisation for JV and associate vessels (excluding the barges which we expect 100% utilisation, (iii) RM170m underwater division revenue, and (iv) RM8.8m pipelay barge JV earnings.

Rating Maintain OUTPERFORM

Valuation  Our target price is increased to RM2.10 (from RM2.07) as we roll forward our valuation base year to FY15. This is based on unchanged CY14 PER of 15x.

 Our ascribed PER is at c.15% discount to the 1.5 standard deviation forward level of 17.2x from 2006-2008. We believe the discount is justifiable due to uncertainties with regards to its underwater division that could yield lumpy earnings going forward.

Risks to Our Call (i) Lower-than-expected OSV and underwater services division; and (ii) lower-than-expected margins on vessels.

Source: Kenanga