ALAM made its second contract award announcement with a lump sum contract worth RM28.3m from Petronas Floating LNG 1 (L) Ltd (PFLNG-1). As it is deemed within our expectations with vessel utilisation of 65% for FY16, we made no changes to our forecasts. Reiterate UNDERPERFORM with a 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.

RM28.3m PFLNG-1 subcontract work secured. Yesterday, ALAM announced that its wholly-owned subsidiary, Alam Maritim (M) Sdn Bhd, has received a Letter of Award from PFLNG-1, a wholly-owned subsidiary of Petroliam Nasional Berhad for a sub-contract work for the supply of miscellaneous marine spreads with the award value of RM28.3 million. The contract is expected to commence in mid-June 2016 until mid-October 2016.

Within expectations. The contract award is positive to ALAM marking the second contract win in 2016. However, this is not a surprise to us and deemed within our expectation. We gather that the contract is a lump sum contract mainly to provide accommodation for offshore workers and ALAM is likely to utilise its AHTS and AWB (jointly-owned vessel) to carry out the work. Therefore, project cost management is essential in order to maximize profit. ALAM is looking to achieve 10% EBIT margin from the contract, slightly lower than its historical 15% EBIT margin during better times. Assuming EBIT margin of 10%, we estimate the contract will contribute RM2.8m to the total EBIT.

No near term reprieve in sight. 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.

Keep UNDERPERFORM call. We made no changes to our current forecast as we already factored higher vessel utilisation at 65% for FY16E as compared to only 51% in 1Q16. Target price 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.

Risks to Our Call:  (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 - 2 Jun 2016