The RM99m 2+1 year IMR work is positive to ALAM, accounting for 89% of our FY17 order-book replenishment assumption. The smaller contract value of RM50m/annum (vs RM60m/annum previously) is not surprising given the aggressive industry-wide cost reduction in recent years amidst industry downturn. Despite maintaining earnings estimates, we upgrade the stock to MARKET PERFORM with higher TP of RM0.31 pegged to 0.4x CY17 P/BV in view of limited downside risk as a result of improving sentiment towards the O&G sector.

RM99m 2+1 year IMR work secured. Yesterday, ALAM announced that its wholly-owned subsidiary, Alam Maritim (M) Sdn Bhd, has been awarded a contract for the provision of subsea Inspection, Maintenance and Repair (IMR) Services by an independent oil and gas exploration and production company. The contract is valued at c.RM99.0m for 2 years with an extension option for another year.

Within expectations. The contract award is positive to ALAM marking the second contract award announcement in 2017. Recall that ALAM is the incumbent for this project, securing RM182.0m IMR works for 3+1 years back in 2013. The smaller contract value of RM50m/annum (vs RM60m/annum) is not surprising given aggressive industry-wide cost reduction in recent years amidst industry downturn. We forecast 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 RM5.0m EBIT per annum.

Anticipating weak OSV utilisation. 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. On the other hand, 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).

No changes to our current forecasts. With the newly secured contract, it brings the YTD win to RM133m, accounting 89% of our RM150m order-book replenishment assumption in FY17. We maintain our earnings forecast (losses of RM27.3m/RM14.8m in FY17/FY18 assuming vessel utilisation of 55%/60%.

Upgrade to MARKET PERFORM call with higher TP of RM0.31 (from RM0.23 previously) despite maintaining our estimates. With the recent share prices resiliency despite the short-term pull-back in oil prices, we reckon that negatives could have priced in and downside risk is limited from current level as a result of improved sentiment. Hence, we raised our valuation to 0.4x Fwd. PBV from 0.3x previously, which is still below the sector average due to oversupply issue. However, take note that earnings recovery could be slower than other sub-segments as increase in vessel utilisation could be at the expense of charter rates.

Risks to our call include: (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 - 22 Mar 2017