News  Yesterday, ALAM received Letter of Award from ExxonMobil E & P Malaysia for the provision of one accommodation barge/vessel for Tapis EOR Brownfield Modifications and Retrofits Project for a total contract sum of RM9.9m.

 The time charter period for the vessel Setia Station 2, a vessel owned through JV by ALAM, is c.3 months effective 31st Jan 2015.

Comments  It is deemed within expectations as we have forecasted RM38.3m revenue for Setia Station 2 FY15. Assuming 35.0% net margin, earnings contribution to the group is expected to be c. RM3.5m.

 We are neutral on the project as it is considered a shortterm charter contract.

 On the back of the envelope calculations shows that the contract implies a DCR of RM110,000/day, which is inline with our RM105,000/day assumption for the vessel.

 The implied DCR is an indication of the still strong demand for work barges despite challenging times in the OSV market in lieu of weak crude oil prices.

 Petronas has approached OSV players to negotiate for cuts in charter rates for its existing contracts to save on OPEX.

 We believe AHTS vessels with relatively high DCRs will be more likely to face rate cuts compared to work barges as supply remains tight for the segment.

Outlook  To-date, there are no signs of Inspection, Repair and Maintenance (IRM) and pipelay subcontract awards.

 The group is hopeful of securing a pipelaying job in 1H15 to rejuvenate the prospects of its 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.

 OSV segment is expected to be challenging in 2015 given the current adverse movement in crude oil prices. On top of that, existing charter contracts by the local OSV players could not be spared from the renegotiation of rates by Petronas.

Forecast  We maintain our forecasts for now.

Rating Maintain UNDERPERFORM

Valuation  Our Target Price is maintained at RM0.59 pegged to unchanged CY15E PER of 7.0x.

 We value the stock at lower range of 7-10x downcycle valuation in an industry down-cycle due to ongoing uncertainties in its Underwater division and potential rate cuts.

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

Source: Kenanga