ALAM reported second consecutive loss-making quarter with core net loss reduced to RM9.8m which is not unexpected due to seasonality. We expect it to turn around in the coming quarters to meet our forecast, in view of (i) better cost management, and (ii) better QoQ vessel utilisation. No changes to our forecasts. Reiterate UNDERPERFORM with target price of RM0.29 pegged to 0.3x CY17 P/BV due to no improvement in the oversupplied OSV market leading to depressed rates.

Loss-making quarter. 1Q16 results is deemed broadly within our expectations but below the streets with a core net loss of RM9.8m after stripping off unrealised forex of RM9.4m. Given that the first quarter is seasonally weak marred by monsoon season, we expect stronger quarters ahead to offset first quarter’s losses. No dividend was declared as expected.

1Q16 sank into RM9.8m losses from RM5.5m profit in 1Q15 dampened by lower OSV vessel utilisation amid a slowdown in the OSV market. This is also reflected in widening of losses in jointly controlled entities contribution to RM6.7m losses from RM1.4m a year ago. Furthermore, underwater services division also registered a 36% decline in revenue due to lesser job performed. Cost savings kicking in. On a QoQ basis, core net loss narrowed 41% from RM40.4m losses in the previous quarter largely due to lower operating cost as a result of better fleet management. It was also helped by narrowing of jointly controlled entities losses to RM6.7m from RM17.3m in the previous quarter despite revenue plunging 50% dragged by lower vessel utilisation (51% in 1Q16 vs 58% in 4Q15).

Orderbook stood at RM508m as at 4Q15. The OSV segment is expected to be challenging in 2016 and 2017 given the current adverse movement in crude oil prices. Renegotiation of charter rates on existing contracts would have already been reflected in 2H15 and expected to stay low in the next few quarters.

Weakening of underwater services margins. Despite ALAM securing multiple underwater services projects last year, we reckon margins are under pressure and will be hit by low asset utilisation in its pipe-lay barge and newly acquired diving support vessel as the contracts secured are mostly short-term thereby creating time gaps in between jobs (1-2 months). We came to understand that its pipelay barge will have to incur approximately RM2m/month (including depreciation) and we believe the mobilisation cost and low utilisation rate will crimp margins despite individual projects being profitable.

Maintain UNDERPERFORM call. We made no changes to our current forecast as we expect ALAM to return to the black in the next two quarters. We rolled our valuation base year to CY17 from CY16 but TP is maintained at RM0.29 pegged to targeted PBV of 0.3x, which is lower than -2SD below its 8-year mean to account for weaker prospect in the near-term. Upside Risk: (i) Better-than-expected OSV and underwater services division, (ii) Higher-than-expected margins on vessels, and (iii) Faster than expected recovery in OSV market. 

Source: Kenanga Research - 25 May 2016