ALAM?s near-term outlook is expected to stay unexciting despite stabilisation of crude oil prices given that the market is still flooded with idle newer vessels. Meanwhile, its dwindling cash position also heightened default risk on maturing sukuk, pending restructuring scheme as required by CDRC. Thus, we downgrade the stock to UNDERPERFORM with a lower target price of RM0.15 pegged to 0.2x FY18 P/BV.

Below expectation. 1Q17 core net losses of RM10.1m came below our and street?s expectations at 45%/241% of the full-year net losses forecasts. The negative deviation was due to lower-than-expected contribution from both offshore marine services and subsea/offshore installation & construction (OIC) segment. No dividend was declared as expected.

Losses narrowed QoQ... ALAM narrowed its core losses by 88% despite revenue falling 56% led by both offshore marine services and subsea segments thanks to: (i) reduced losses from its associate and JV as well as lower cost despite stripping off one-off impairment cost, (ii) lower finance cost, and (iii) lower depreciation.

?but widened slightly YoY. Its CNL widened by 3% in line with 58% fall in top-line, dragged by doubling losses in offshore marine services segment but was offset by narrowing losses from subsea division coupled with lower losses from JV and associate.

Expecting deeper 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 increase our FY17- 18E losses estimates by 37% and 91% to RM31.3m and RM19.3m, respectively, accounting for lower FY17-18E vessel utilisation to 50%- 55% from 55%-60%.

Debt restructuring to avoid default. Recall that ALAM had received letter of approval from CDRC, which requires it to submit a restructuring scheme within 60 days. ALAM has sukuk of RM30m due in July this year and another RM45m in Jan 2018. As of 1Q17, ALAM has cash and bank balances of RM37.5m and the sinking fund set aside is reduced to RM11.7m from RM28.4m as of 4Q16. This casts further doubt on whether ALAM is able to repay the first maturing sukuk in July.

Downgrade to UNDERPERFORM call. Pending a clearer restructuring plan and rolling over our valuation base year to FY18, we lower our TP to RM0.15 from RM0.31 pegged to lower PBV of 0.2x, which is lower than -2.0SD below its 8-year mean to account for higher financial risk arising from potential default on maturing sukuk and 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 - 31 May 2017