News  Yesterday Alam Maritim Resources Bhd (ALAM) announced that it has proposed a 15.35% (c. 123m shares raised) private placement to Associated Land Sdn Bhd (an indirect subsidiary of Hong Leong Company (Malaysia) Bhd) and Caprice Capital Intl at an issue price of RM1.35/share.

 The issue price represents a discount of c.11.09% to the 1-month VWAMP of ALAM shares up to and including 21 April 2014 of RM1.52.

 The proposal is subject to Bursa Malaysia and shareholder approvals, but if all goes well, will be completed by 2Q14.

Comments  We were not surprised by the news as there have been market rumours that ALAM was looking at fund raising exercise to facilitate a vessel acquisition.

 Proceeds of RM166.1m will be channelled to: (i) the acquisition of an offshore support vessel (RM39.7m), (ii) general working capital (RM27.5m), (iii) repayment of bank borrowings (RM95.1m), and (iv) expenses related to the share issuance (RM3.8m).

 The asset is likely to be a diving support vessel that has been mentioned in recent market talks, and very likely to be on a JV basis given the RM39.7m allocated (vessel will cost c.US$80m (c.RM260m)).

 We estimate the private placement will result in 10.7-11% dilution in FY14-15 EPS. But we believe such dilutions could be mitigated by the new earnings assuming the DSV wins inspection, repair and maintenance (IRM) work within the year. Management guides that there is RM2b of work still up for grabs. Assuming ALAM wins c.RM400m (20% success rate) worth of contracts within CY14 and recognises revenue over 3-years with a 25% net margin, it would minimise FY14’s EPS dilution and reverse FY15 EPS dilution.

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 will rely on the DSV that it is looking to acquire post the private placement. Guidance is for better net margins for underwater works given that ALAM co-owns the vessel.

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

Forecast  We maintain our forecasts for now pending the completion of the proposed private placement.

Rating Maintain OUTPERFORM

Valuation  Our target price is maintained at RM2.10, based on unchanged CY14 PER of 15x. Post the private placement before any new earnings from the DSV, fair value could be RM1.86/share.

 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