The RM26m utility boat contract win is positive to ALAM and exceeds our orderbook replenishment assumption by 6%. Following that, we narrow our FY17/18 losses estimates factoring higher contract win. While the small contract win is unlikely to excite the market, we maintain our MARKET PERFORM call on the counter with unchanged TP of RM0.31 pegged to 0.4x CY17 P/BV.

One utility boat charter contract. Yesterday, ALAM announced that its wholly-owned subsidiary, Alam Maritim (M) Sdn Bhd, was recently awarded a contract for the provision of one Unit of 40 Tonnes Bollard Pull Utility Boat for Terengganu Crude Oil Terminal Operation by Petronas Maritime Services Sdn. Bhd. The contract is valued at RM26.1m with a duration of four years and 211 days plus an extension option of another year.

Within expectations. The contract award is positive to ALAM, marking the third contract award announcement in 2017, which will help to improve its overall vessel utilisation. Based on our back of envelope calculations, the contract implies a DCR of RM15.6k/day, which is >20% lower as compared to previous contracted rate of RM20k/day few years back. While specific vessel utility vessel is not disclosed, ALAM’s utility vessels have an average age of 9 years. Hence, we anticipate the contract to fetch EBIT margin of 10%, lower than its historical 15% EBIT during better times. Assuming EBIT margin of 10%, we estimate the contract will contribute RM0.6m to its EBIT per annum.

Weak OSV utilisation to persist. The OSV segment is expected to stay challenging in 2017 despite stabilisation of crude oil prices given that the market is still flooded with idle newer 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).

Keeping our current forecasts. With the newly secured contract, it brings the YTD win to RM159m, exceeding our RM150m order-book replenishment assumption for FY17 by 6%. Thus, we are narrowing our FY17/18E losses forecast by 16%/32% to RM22.8m and RM10.1m respectively assuming higher orderbook replenishment of RM200m.

Reiterate MARKET PERFORM call with unchanged TP of RM0.31, pegged to our valuation of 0.4x Fwd. PBV, which is still below the sector’s 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: (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 - 04 Apr 2017