The RM20m AHTS contract win is positive to ALAM but is within our order-book replenishment assumption. Thus, no changes to our losses forecasts. We believe the small contract win is unlikely to excite the market, we maintain our UNDERPERFORM call on the counter with unchanged TP of RM0.15 pegged to 0.2x CY18 P/BV in view of the lacklustre OSV market and rising default risk on maturing sukuk.

RM20m ATHS contract win. Yesterday, ALAM announced that its wholly-owned subsidiary, Alam Maritim (M) Sdn Bhd, has recently been awarded with charter contracts of three units of Anchor Handling Tug & Supply (AHTS) vessels by oil and gas companies totalling up to RM19.8m. The charter contracts' durations are as follows: 1 AHTS vessel - for a firm period of three months with an extension option of one month and a further extension option on weekly basis; 1 AHTS vessel - for a firm period of six months with an extension option of four months and a further extension option on weekly basis; and 1 AHTS vessel - for a firm period of two years with an extension option of one year.

Within expectations. The contract award is positive to ALAM, marking the four 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 RM13k/day, which is >30% lower as compared to previous contracted rate of RM20k/day few years back. While specific vessel utility vessel is not disclosed, ALAM has 18 AHTS vessels with an average age of nine years old. We anticipate the contract to fetch EBIT margin of 8%, lower than its historical 15% EBIT during better times. Assuming EBIT margin of 8%, we estimate the contract will contribute RM0.4m to its EBIT per annum.

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 has been 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.

Maintaining our current forecasts. With the newly secured contract, it brings the YTD win to RM179m, within our order-book replenishment of RM200m. Thus, we are maintaining our FY17-18E losses forecasts of RM31.3-19.3m assuming vessel utilisation of 50-55%.

Reiterate UNDERPERFORM call. 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 a restructuring scheme as required by CDRC. Thus, we maintain our UNDERPEROFRM call with unchanged TP of RM0.15, pegged to our valuation of 0.2x FY18 PBV, which is still below the sector’s average due to oversupply issue. 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 - 1 Jun 2017