News

ALAM was awarded a subcontract by PETRONAS Floating LNG (L) Ltd (PFLL) for the engineering, procurement, installation and related activities for the floating liquefied natural gas (FLNG) Offshore works – Mooring System Installation (Package No.1).

Contract award is valued at RM49.0m which spans from 20th May 2015 to 15th September 2015.

Comments

This is definitely positive to the group as it potentially signifies the start of its underperforming Underwater division gaining traction with more contracts of similar nature to be secured by the group if they are able to establish a good track record for such jobs.

In FY15, we have assumed RM100m revenue and RM15m EBIT for the Underwater division. It is the group’s intention to secure more Underwater projects this year to improve the division’s profitability.

We reckon the group will utilize its in-house accommodation work barge for the execution of the contract.

Assuming 15% operating margin, the contract is expected to contribute c.RM7.2m EBIT to the group this year. This will provide further buffer for the group’s overall earnings which may potentially face downside headwinds from its uncertain OSV division.

Outlook

The group is hopeful of securing more jobs for its Underwater division after September to improve its profitability.

Underwater division’s near-term outlook has improved slightly with the contract award, indicating a potential sustainable improvement in the division moving forward.

OSV segment is expected to be challenging in 2015 given the current adverse trend in crude oil prices. Vessel utilization is expected to be under pressure this year as oil companies slow down their activities in general. On top of that, existing charter contracts by the local OSV players are not expected to be spared from the renegotiation of rates by Petronas.

We believe the impact of rate cut should be more severe on vessels under high DCRs (>USD2.2/bhp). The potential cut in rates could be in the region of 5-10% as opposed to the 20%-30% cut by PETRONAS, as per our channel check.

Forecast

We maintain our forecasts for now as it is deemed in line with our expectation.

Rating

Maintain UNDERPERFORM

Valuation

Our Target Price is maintained at RM0.61 pegged to unchanged CY16 PBV of 0.7x.

The target multiple is close to 1.5 SD below its 8-year historical average as we expect near-term weakness in the OSV market.

Risks to Our Call

(i) Better-than-expected OSV & underwater services division and (ii) Higher-than-expected margins on OSV vessels.

Source: Kenanga Research - 12 Jun 2015