Despite ALAM recording stronger 3Q16 results, we remain concerned over its widening negative cash flows as at end- 9M16 as the outlook stays challenging in the OSV space no thanks to oversupply issue and depressed rates. Reiterate UNDERPERFORM with a lower target price of RM0.19 pegged to 0.2x CY17 P/BV following earnings cut in view of higher impairment risk amidst prolonged low oil prices.

Below expectation. 9M16 results came below our and street’s expectations of RM5.5m and RM3.2m, respectively, with cumulative core net losses of RM2.2m after stripping off unrealised forex losses of RM12.1m. The negative deviation was due to weaker-than-expected margins. No dividend was declared as expected.

Stronger quarterly performance. ALAM registered strong growth of 194% from a low base core earning of RM2.0m in 2Q16 to RM5.7m in 3Q16 underpinned by stronger JV contribution (+1.9 times QoQ) as well as better cost efficiency as evident in improvement in gross margin to 9.1% from 6.8% in the preceding quarter despite revenue dropping 15% amidst weaker utilisation.

Still in red cumulatively. On a YoY basis, core net profit also improved from a minimal profit of RM0.3m in 3Q15 even though revenue dropped 30% YoY thanks to turn around performance of its JV from a loss of RM4.8m, 48% reduction in finance cost and a tax credit of RM0.5m vs. tax expense of RM3.1m in 3Q15. Cumulatively, ALAM still posted a core net loss of RM2.2m, down from RM13.2m profit in 9M15 marred by lower vessel utilisation resulting in margin erosion. (10.7% gross margin in 9M16 vs. 22.0% in 9M15).

4Q16 could be seasonally weaker. The currently challenging OSV segment is expected to be extended into 2017 given the prolonged low crude oil prices. Therefore, we expect lower earnings QoQ in 4Q16 in view of weaker utilisation entering monsoon season. We slashed FY16E and FY17E earnings by 64% and 47% to RM2m and RM3m, respectively, factoring lower margins.

Maintain UNDERPERFORM call. Balance sheet wise, ALAM’s net gearing remained acceptable at 0.11x despite inching from 0.08x in 4Q15 following debt repayment and negative OCF in 9M16. TP is lowered to RM0.19 from RM0.29 pegged to targeted PBV of 0.2x, which is lower than -2SD below its 8-year mean to account for weaker prospect in the near-term and higher impairment risk. 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) Fasterthan-expected recovery in OSV market.

Source: Kenanga Research - 28 Nov 2016