We expect ALAM to remain in the red for the next two years following disappointing FY16 results as we believe the gradual improvement in O&G sector might not benefit the company materially in the near-term. Thus, we downgrade the stock to UNDERPERFORM with a lower target price of RM0.23 pegged to 0.3x CY17 P/BV post earnings cut in view of challenging outlook.

Below expectation. FY16 results came below our and street?s expectations of RM2.0m and RM1.3m, respectively, with cumulative core net losses (CNL) of RM84.9m after stripping off unrealised forex losses of RM9.9, multiple impairments on PPE, JV & receivables totalling up to RM36.6m. The negative deviation was due: to (i) lower- than-expected offshore marine services contribution, and (ii) unexpected widening losses from associate and joint venture amidst weaker OSV utilisation. No dividend was declared as expected.

Unexpected huge losses in 4Q16. ALAM slumped into massive core net losses of RM82.8m in 4Q16 from RM5.7m profit in the previous quarter in tandem with 35% drop in revenue largely dragged by widening losses from offshore marine services segment. This is further amplified by losses from associate and JV despite stripping off one-off impairment cost. We suspect the poor performance was due to fixed overhead cost as well as depreciation charge amidst drastic drop in charter revenue.

Cumulatively in red as well. On a YoY basis, its CNL also widened more than 100% from RM40.5m in line with 53% fall in top-line mainly attributable the abovementioned reasons. Cumulatively, ALAM posted a CNL of RM84.9m, widening from RM27.3m losses in FY15 marred by lower vessel utilisation resulting in margin erosion. (-1.0% gross margin in FY16 vs. 2.8% in FY15). Note that the underwater services also recorded a segmental loss of RM26.0m in FY16 from RM3.7m profit in FY15 even though top-line improved by 26% suggesting that project margins deteriorated significantly.

Expecting losses in the next two years. The current challenging OSV segment is expected to be extended this year given slower contract award in OSV space. Therefore, we forecasted losses of RM27.3m factoring: (i) higher losses from JV and associate, and (ii) lower vessel utilisation to 55% from 60%. FY18E net loss of RM14.8m is introduced assuming 11% growth in revenue backed with better utilisation at 60%.

Maintain UNDERPERFORM call. Following earnings downgrade, we lower our TP to RM0.23 from RM0.28 pegged to unchanged PBV of 0.3x, which is lower than -1.5SD below its 8-year mean to account for weaker prospect in the near-term as we believe earnings turnaround could be challenging in the near-term. Thus, we downgrade the stock to UNDERPERFORM 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 - 01 Mar 2017