Period  2Q14/1H14

Actual vs. Expectations Alam Maritim (ALAM) reported 2Q14 core net earnings of RM21.5m, bringing 1H14 core net profit to RM33.8m which was below expectations, accounting for only 34.6% of our full-year forecast (RM97.7m) and 32.8% of consensus’ estimates (RM102.8m). Our estimated core 1H14 net profit excludes a disposal gain of RM3.3m which was recognised in 1Q14.

 The variances to our forecasts are due to: (i) lower-than-expected vessel utilisation as we understand that 10-11 vessels are on scheduled maintenance within 2014 and (ii) lack of material projects for 1-MAS (pipelay barge) that resulted in losses for the underwater division.

Dividends  No dividend was declared as expected.

Key Results Highlights QoQ, 2Q14 core net profit was up 75.0% mainly due to higher contributions from the underwater division with the kick-start of Talisman project in 2Q14. We note that there were losses in the underwater division of the JV-line which we suspect the reason being the 1-MAS pipelay barge remained underutilised in 2Q14.

 YoY, 2Q14 net profit was down by 14.3% due to lower average utilisation of vessels and lower 1-MAS contributions.

 YTD, net profit was down 28.6%, again mainly due to the lower underwater services and lower utilisation of ALAM’s OSVs due to maintenance and offhire days on the request of the client.

Outlook  While ALAM still hopes to win Inspection, Repair and Maintenance (IRM) works within the year; the pipelay barge (1-MAS) job prospects for 2014 seem dim as there as less subcontract opportunities from the Transport and Installation (T&I) players for now.

 Negotiations to purchase a Diving Support Vessel (DSV) are still ongoing; however, moving ahead, ALAM guided that it is also looking to bring the liftboat to Malaysian waters.

 Both are catalysts for FY15 given that the DSV will enhance ALAM’s chances for the IRM jobs and underwater contract margins; whilst the liftboat will be a new OSV concept for Malaysian oil and gas players.

Change to Forecasts We have cut our FY14E net profit estimates by 20.6% to RM77.6m (from RM97.7m) as we: (i) incorporate losses of RM12m for the pipelay barge; (ii) lower average utilisation rate of 80% for ALAM’s vessels in the year given the maintenance exercises that are ongoing and (iii) lower our 3rd party OSV charter expectations.

 We have cut our FY15 net profit estimates by 12.7% to RM100.8m (from RM111.7m) as we (i) incorporate fewer jobs for the pipelay barge given subcontract prospects seem spotty due to fierce competition; and (ii) lower average utilisation of vessels as we opt to be conservative on that as well.

Rating Maintain OUTPERFORM

Valuation  Our forecasts cuts led to our target price reduced to RM1.64 (from RM1.86), 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.

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

Source: Kenanga