Deemed within our expectations. 1H17 core net loss of RM8.5m came at 27%/50% of house/street’s full-year net loss forecasts. This is within our expectations as we expect a weaker 2H17 due to weaker charter rates and vessel utilisation. No dividend was declared as expected.

Returned to the black. ALAM climbed back to the black with a core net profit of RM1.7m in 2Q17 from RM10.1m losses in 1Q17 due to 1.7x jump in revenue as a result of better vessel utilisation and higher OIC revenue leading to higher operating margins and improvement in JV & associates earnings. YoY, ALAM’s earnings slipped by 14% or RM0.3m from RM2.0m earnings in 2Q16 dragged by 35% decline in revenue but offset by lower interest expense and stronger JV and associate earnings. Cumulatively, 1H17 core loss widened by 7% to RM8.5m from RM7.9m losses in 1H16 as a result of poorer performance from both OSV and OIC segments.

Expecting weaker 2H17. The current challenging OSV segment is expected to be extended this year given slower contract awarding in the OSV space. Therefore, we maintain our FY17-18E losses at RM31.3m and RM19.3m, respectively, assuming FY17-18E vessel utilisation of 50-55%.

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 presented a Proposed Restructuring Scheme (PRS) to CDRC on 11 August and the first CDRC creditors meeting was held on 22 August, 2017. Apart from its RM151.7m total borrowings, note that ALAM has contingent liabilities, comprising bank and performance guarantees for contracts entered into with customers, at RM40.8m as well as c.RM400m corporate guarantees to respective JV & associates.

Maintain UNDERPERFORM call. Pending a clearer restructuring plan and coupled with no reprieve in the near-term outlook, we maintain our UNDERPEROFRM call with unchanged TP of RM0.08 pegged to valuation of 0.1x FY18E PBV, which is still below the sector’s average and in line with PERISAI’s valuation.

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 - 28 Aug 2017