Period  1Q14

Actual vs. Expectations Alam Maritim (ALAM) reported 1Q14 core net earnings of RM12.3m which accounted for 12.6% of our full-year forecast (RM97.7m) and 11.9% of consensus estimate (RM102.8m).

 Our estimated core 1Q14 net profit excludes a gain on disposal of RM3.3m recognised in 1Q14.

 We deem the reported earnings as within expectations as 1Q is seasonally a weak quarter for offshore asset owners, and the quarter was further hampered by the lack of underwater division activity as the subsea Talisman project has yet not to be executed. Management guides this will kick-start later.

Dividends  No dividend was declared as expected.

Key Results Highlights

 QoQ, 1Q14 core net profit was lower (-43.2%) mainly due to lower JCE earnings (-59.3%) which were caused by sluggish underwater division activities. As mentioned above, no Talisman subsea IRM activity was performed and we also suspect that its 50%-owned pipelay barge was also unutilised.

 YoY, 1Q14 net profit was again down, by 44.8% namely due to lower underwater division contributions. In 1Q13, the underwater division executed two short-term projects, which earned stellar margins (i.e. 28% EBIT margin).

Outlook  ALAM announced contract extensions for one straight supply vessel (SSV) and four utility vessels (UV) yesterday. The SSV was extended for one year; whilst the UVs were extended for three years. Cumulative worth of such extensions is RM71m. As we have already forecasted for contract continuity, we are maintaining our assumptions for now.

 ALAM has recently submitted the listing application for its proposed new private placement exercise (+123m shares) to Associated Land Sdn Bhd and Caprice Capital Intl. Ltd. The proceeds will partly be utilised to acquire a Diving Support Vessel (DSV) which will enhance the margins and contract bid for Inspection Repair Maintenance (IRM) contracts to supplement the continued growth of its Underwater division.

 ALAM guided no more OSV vessel additions in the near future.

 For the pipelay barge 1MAS, ALAM is also targeting subcontract works, including prospects from the Pan Malaysia T&I players.

Change to Forecasts We maintain our FY14-15E forecasts for now.

Rating MAINTAIN OUTPERFORM

Valuation  Our target price is maintained at RM2.10, 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, which could yield lumpy earnings going forward.

 ALAM’s ex-private placement target price is estimated to be RM1.86/share assuming no new Inspection Repair Maintenance (IRM) contracts within FY14-15E.

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

Source: Kenanga