ALAM made its first contract award announcement in 2017 with a lump sum contract worth RM34.0mm for the demobilisation work of FPSO Perisai Kamelia. As it is deemed within our expectations with vessel utilisation of 55% for FY17, we made no changes to our forecasts. Reiterate UNDERPERFORM with a target price of RM0.23 pegged to 0.3x CY17 P/BV due to no improvement in the oversupplied OSV market leading to depressed rates.

RM34m demobilisation subcontract work secured. Yesterday, ALAM announced that its wholly-owned subsidiary, Alam Maritim (M) Sdn Bhd, has been awarded a contract for the provision of offshore construction subcontractor for demobilisation work of FPSO Perisai Kamelia. The contract value is c.RM34.0m with an additional scope for water treatment at a provisional sum of RM1.0m.

Within expectations. The contract award is positive to ALAM marking the first contract award announcement in 2017. However, this is not a surprise to us and deemed within our expectation. We anticipate the contract to fetch 10% EBIT margin, lower than its historical 15% EBIT margin during better times. Assuming EBIT margin of 10%, we estimate the contract will contribute RM3.4m EBIT in FY17.

No near-term reprieve in sight. The OSV segment is expected to stay challenging in 2017 despite stabilisation of crude prices given that the market is still flooded with idle young vessels. As such, we do not foresee a strong recovery in charter rates in the near term.

Weakening of underwater services margins. We reckon margins for underwater services segment are under pressure and will be hit by low asset utilisation in its pipe-lay barge and diving support vessel as the contracts secured are mostly short-term, thereby creating time gaps in between jobs (1-2 months). ALAM is still actively tendering for multiple short-term jobs and should the company exceed our order-book replenishment assumption, it would serve as a re-rating catalyst to the stock.

No changes to our current forecasts as we have factored in RM150m contract win with an average utilisation of 55%. With that, we still believe ALAM could register losses of RM27.3m losses which will subsequently narrow to RM14.8m losses in FY18 assuming 11% growth in revenue backed with better utilisation at 60%.

Keep UNDERPERFORM call with an unchanged TP of RM0.23 pegged to 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.

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 - 09 Mar 2017