News

Yesterday, ALAM was awarded the contract for Installation Works for replacement of subsea pipeline at Chevron’s Prai Terminal for a total contract sum of RM22.0m from Chevron Malaysia.

It is a short-term contract which commences in early June 2015 and expected to be completed by end Dec 2015.

Comments

This is the 3rd underwater contract secured for the year, bringing total contract secured for the division to a total of RM81.0m. It is in line with our earlier expectations as ALAM has been actively bidding for subsea contracts since early this year.

In FY15, we had forecasted RM100m revenue and RM15m EBIT for the Underwater division which is on track to achieve.

We reckon the group will utilize the 1-MAS, its pipe lay accommodation work barge for the execution of the contract.

Assuming 15% operating margin, the contract is expected to contribute c.RM1.7m JV earnings to the group this year as it is secured under Alam Swiber Offshore (M) Sdn Bhd.

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 this year given the current adverse trend in crude oil prices. Vessel utilization is expected to be under pressure this year as oil companies slow down 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 for 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.

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 1.5SD 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 - 24 Jun 2015