News

ALAM announced that Workboat International DMCCO, a subsidiary of ALAM held through Alam Maritim (L) Inc, has entered into a Charter Party Agreement with Allianz Middle East Ship Management LLC, a company incorporated in United Arab Emirates for the provision of one unit of Safety Standby Rescue Vessel.

The contract is for the vessel charter of MV Setia Emas, owned by ALAM for a primary period of three years with an extension option of another two years while contract value is at RM40.7m including extension options.

Comments

It is a positive surprise that the group has managed to secure a charter contract in the Middle East given the expectation of strong O&G activities in line with OPEC’s initiative to ramp up production despite weak crude oil prices.

We have imputed revenue of RM8m top line from the AHT vessel in FY16, which is largely in line with the top line p.a. implied by the contract secured. Assuming 75% vessel utilization, the implied DCR is estimated at USD1.7/bhp, which is a decent charter rate given the current market condition.

This marks the group’s initial steps in diversifying away from its dependence on the local AHTS market which is oversupplied with lower spec vessels.

Outlook

The group is hopeful of securing more jobs for its Underwater division 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

Upgraded to MARKET PERFORM from UNDERPERFORM due to improved reward-to-risk consideration after the recent share price corrections.

Valuation

Our Target Price is reduced to RM0.51 from RM0.61 previously as we peg it to a lower 0.6x from 0.7x CY16 PBV due to higher uncertainty in its near-term earnings prospect with crude oil prices resuming its downtrend again.

The target multiple is at 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 - 5 Aug 2015