We believe ALAM may be able to restructure and resolve the RM30m sukuk backed by RM28m sinking fund but the next, which is the last sukuk repayment of RM45m is in need to be restructured given the weak operating environment. Pending announcement of 1Q17 results, we maintain our MARKET PERFORM call on the counter with an unchanged TP of RM0.31 pegged to 0.4x CY17 P/BV.

Approval from CDRC granted. Last Friday, ALAM announced that the company had received a letter dated 24 May 2017 issued by the Corporate Debt Restructuring Committee (CDRC)?s approval for assistance to mediate between the company and its certain subsidiaries, joint-venture companies and associated companies as well as its respective financiers/Sukuk-holders.

This is a proactive measure taken by ALAM to safeguard its business from any potential financial distress, which may elicit a cross-default in other financing facilities and Sukuk. With the approval, the company is required to comply with the followings;

i) Submit a proposed debt restructuring scheme within 60 days from the day of CDRC approval letter

ii) ALAM?s admission is limited to 12 months or upon signing of a debt restructuring agreement, whichever is earlier and

iii) The scheme must comply with the CDRC?s restructuring principles for ALAM to continue to remain under the Informal Standstill Arrangement with the respective financiers.

RM30m Sukuk due in July. Note that ALAM has sukuk amounting RM30m due in July this year and another RM45m in Jan 2018. Meanwhile, ALAM also has RM19.7m of term loans, of which RM4.4m is classified as current liabilities. As of 4Q16, ALAM has cash and bank balances of RM45.1m, of which RM28.4m is set aside as sinking fund for the repayment of sukuk. Therefore, we believe ALAM may be able to restructure and resolve the RM30m sukuk backed by RM28m sinking fund but the next, which is the last sukuk payment of RM45m is in need to be restructured/deferred given the current weak operating environment.

Tight cash flow to persist. Despite net gearing level remains low at 0.2x as of 4Q16, ALAM recorded negative cash flow from operations of RM32.3m following a 29% YoY decline in revenue as well as a huge repayment of payables in FY16. Going forward, we expect the weak cash flows from operations to maintain given that ALAM is aiming to register a revenue of between RM200m-300m backed by an orderbook of RM390m.

No reprieve in OSV market. 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. We are keeping our earnings forecast pending announcement of 1Q17 results this week.

Maintain 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 - 29 May 2017