News

Yesterday, Alam Maritim Resources (ALAM) announced that MDSV 1 (L) Inc, a wholly-owned subsidiary of Deepsea Leader Venture (L), a (50:50) JV alliance between ALAM andValianz Inc had signed a Memorandum of Agreement with Wellspring Marine Trading Ltd to acquire a Diving Support Vessel namely OLV Venture 1 for USD60.0m. (c.RM210.0m assuming MYR:USD of 3.5 (in-house estimate).

The acquisition is expected to be completed by mid-April this year and will be funded partly by proceeds from recent new shares issuance and bank borrowings with staggered payment structure.

Comments

We were not surprised by the announcement as the company has been looking to acquire a DSV to replace the chartered-in vessel currently utilized for its current Underwater contract.

However, this is positive as it gives the group more control over their Underwater assets, thereby giving them an edge to secure more Underwater contracts in the future.

Therefore, the asset acquisition is expected to be revenue neutral to the group. We do not rule out possible cost savings from the asset acquisition, but we choose not to factor in any savings for its Underwater division to remain conservative in view of high uncertainty in the business division.

Assuming 80:20 debt to equity financing, c.RM84.0m of borrowings needs to be raised, which will in turn increase its net gearing from 0.2x to 0.4x in FY15, which is still deemed a comfortable level for ALAM.

OLV Venture 1 was built in 2014 with specificationsof 85M DP2 6000 bhp. This mid-tier specs offshore OSV is planned to be deployed within Malaysia and South-East Asia region.

Outlook

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

The group is hopeful of securing a job for 1MAS S-300, its pipelay accommodation barge co-owned with Swiber in1H15 to rejuvenate the prospects of Underwater division.

Underwater division’s outlook remains uncertain with lack of jobs on hand amidst low crude oil price environment.

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 is not expected to be spared from the renegotiation of rates by Petronas.

We believe the impact should be more severe on vessels under high DCRs (>USD2.2/bhp).

Forecast

We maintain our forecasts for now as we opt to remain conservative in our earnings outlook for Underwater division amid challenging O & G environment.

Rating

Maintain UNDERPERFORM

Valuation

Our Target Price is maintained at RM0.44 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 uncertainties in its Underwater division and potential rate cuts.

Risks to Our Call

1. Better-than-expected OSV & underwater services division and
2. Higher-than-expected margins on vessels.

Source: Kenanga Research - 25 Mar 2015