News  Yesterday, Alam Maritim (ALAM) announced that it had received a 2-year Letter of Extension for its accommodation barge and its Anchor Handling Tug Supply vessels.

 The contracts are worth an approximate RM75.2m and will be chartered till Oct-16.

Comments  We were not surprised by the win; given that there is a lack of accommodation work barges in the Malaysian waters.

 Our back-of-the-envelope calculation yields that the contract is worth c.RM103k/day with majority of the contract sum, we believe, attributable to the charter rate for the accommodation barge.

 We have already assumed continuity in the contracts as such we do not look to amend our earnings forecasts for the extension.

Outlook  We note that the outlook for ALAM seems muted in the short-run.

 To-date, there is no sign of Inspection, Repair and Maintenance (IRM) and pipelay subcontract awards which can rejuvenate the prospects of the Underwater division.

 Negotiations to purchase a Diving Support Vessel (DSV) and third-party liftboat opportunities are also still ongoing with no firm deadlines at this juncture.

 Besides that we note the OSV market now has wider choice of modern and new vessels given other OSV companies have undergone fleet renewal programmes and rejuvenated their fleet profile (i.e. Icon Offshore; Jasa Merin) making the segment increasingly competitive.

Forecast  Given the short-term bearish outlook, we opt to be more conservative on ALAM’s FY15E prospects, especially in regards to the pipelay-barge prospects, where we now forecast a slight loss of RM2.0m (from a profit of RM4.8m previously). This reduces our FY15 net estimates by 5% to RM95.8m (from RM100.8m).

Rating Downgrade to MARKET PERFORM (from OUTPERFORM)

Valuation  In lieu of sluggish domestic contract flows and Petronas’ cautionary announcement to slow down FY15 capex, we have trimmed the target PERs of most of stocks under our coverage by 1x.

 Our forecasts and PER cuts (to 14x from 15x previously) reduces our target price on ALAM to RM1.45 (from RM1.64).

 Our ascribed PER is now closer to the average 2-year forward PER of 14.5x seen for ALAM during 2006-2008 period which is considered the boom years for the OSV segment.

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

Source: Kenanga