Period  3Q14/9M14

Actual vs. Expectations Alam Maritim (ALAM) reported 3Q14 core net earnings of RM19.0m, raising 9M14 core net profit to RM52.8m. This was below expectations, accounting for only 68.0% of our full-year forecast (RM77.6m) and 61.1% of consensus’ estimates (RM86.4m). Our estimated core 9M14 net profit excludes a disposal gain of RM3.3m recognised YTD.

 The variances to our forecasts are largely due to: (i) lower-thanexpected vessel utilisation and (ii) lower earnings contribution from subsea/OIC segment.

Dividends  No dividend was declared as expected.

Key Results Highlights Core net profit was down 11.6% QoQ; despite revenue surging by 55.8% as the underwater division saw significant drop in earnings (-91.8% EBIT); likely due to under-utilisation of the pipelay barge in 3Q14.

 Core net profit; was similarly down by 12.4% YoY, largely due to sluggish JV earnings as utilisation rate for chartered vessels dropped potentially due to unexpected maintenance costs for its vessels.

 YTD, core net profit was down 23.5%, again mainly due to the lower earnings contribution from subsea/OIC segment and lower utilisation of ALAM’s OSVs.

Outlook  To-date, there are no signs 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 thirdparty liftboat opportunities are also still ongoing with no firm deadlines at this juncture.

 Our market temperature checks with OSV companies yield that the mid-term prospects for the segment is sluggish and we suspect the segment is now highly competitive given OSV companies have undergone fleet renewal programmes in the last 2-3 years (i.e. Icon Offshore; Jasa Merin).

Change to Forecasts Given the short-term bearish outlook, we opt to be more conservative on ALAM’s FY14-15E prospects.

 For FY14 we have lowered our OSV utilisation to 80% (from 83%) This reduces our net profit forecasts by 5.4% to RM73.4m (from RM77.6m).

 We are also reducing our FY15 net estimates to account for higher losses from the pipelay barge (similar loss of RM12k versus RM2k recently) and 85% OSV utilisation (from 87% utilisation previously). This reduces FY15 forecasts by 19.1% to RM77.5m (from 95.8m).

Rating Downgrade to MARKET PERFORM (from OUTPERFORM)

Valuation  We trim our target CY15 PER on ALAM to 10x (from 14x previously) in lieu of the: (i) weakness in forward prospect for the sector given the uninspiring current crude oil trends, (ii) Petronas’ cautionary statement on reviewing capex allocation for 2015, and (iii) the heightened competition within the segment that makes contract wins hard to come by.

 Our forecasts and PER cuts reduces our target price on ALAM to RM0.84 (from RM1.45).

 Our ascribed PER coincides with the historical -1 standard deviation forward level of 10x that the sector trades at.

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

Source: Kenanga