ALAM finally returned to the black after two consecutive lossmaking quarters. We expect it to stay profitable in the coming quarters to offset its cumulative losses of RM7.9m, in view of (i) better cost management, and (ii) similar vessel utilisation. No changes to our forecasts. Reiterate UNDERPERFORM with a target price of RM0.29, pegging to 0.3x CY17 P/BV due to no improvement in the oversupplied OSV market leading to depressed rates.

Deemed within our expectation. 1H16 results were deemed broadly within our expectations of RM5.5m profit estimates with cumulative core net losses of RM7.9m after stripping off unrealised forex losses of RM4.2m as we expect stronger 2H16 to offset losses. However, we believe the earnings recovery quantum might be insufficient to meet consensus full-year forecast of RM15.2m. No dividend was declared as expected.

2Q16 returned to the black with core net profit of RM2.0m from RM9.8m losses in 1Q16, in tandem with 70.2% increase in top line, helped by higher OSV vessel utilisation post monsoon season (57% in 2Q16 vs 51% in 1Q16). This is also reflected in improvement in jointly-controlled entities’ contribution to a profit of RM1.9m from RM6.7m losses in 1Q16.

Still in red cumulatively. On a YoY basis, core net profit weakened 74% despite a marginal 4% increase in revenue. We suspect the poorer performance was largely due to stubborn fixed overhead cost which impaired its EBIT margin to 12.6% from 15.7% in 2Q16. Cumulatively, ALAM still posted a core net loss of RM7.9m, down from RM12.9m profit in 1H15 marred by lower vessel utilisation resulting in margin erosion. (2.7% EBIT margin in 1H16 vs. 15.4% in 1H15).

No near-term catalyst. 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.

Maintain UNDERPERFORM call. We believe ALAM will continue to emphasise on cost management such as reducing the fleet stacking cost to improve its bottomline. Thus, we made no changes to our current forecast as we expect ALAM to stay in the black in the next two quarters. 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. Keep UNDERPERFORM call in view of no improvement in the oversupplied OSV market leading to depressed rates

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 Aug 2016