9M17 results sank into deeper losses, owing to weaker contribution from both marine services and OIC segments. Pending a clearer restructuring plan and coupled with lack of reprieve in the near term, we widen our FY17-18E loss estimates by 23%-55% and maintain our UP call with a lower TP of RM0.070 pegged to a valuation of 0.1x FY18E PBV, which is still below the sector’s average and in line with peer PERISAI’s valuation.

Below expectations. 9M17 core net loss of RM25.2m came at 81%/96% of house/street’s full-year net loss forecasts. On our side, the underperformance is due to weaker-than-expected contribution from offshore marine services and subsea services/offshore installation construction (OIC) segments. No dividend was declared as expected.

Sank into the red. ALAM slipped into the red with core net losses of RM16.8m in 3Q17 from RM1.7m profit in 2Q17 in tandem with 22% drop in revenue due to weaker vessel utilisation and lower contribution from sub-sea services/OIC segment.

YoY, ALAM also turned to losses from RM3.0m profit in 3Q16 dragged by 40% decline in revenue similar to the same reasons mentioned above coupled with JV and associate’s cumulated losses of RM1.5m (vs. RM4.2m profit contribution in 3Q16). Cumulatively, 9M17 core loss widened by 10.7x to RM25.2m from RM2.2m losses in 9M16 as a result of poorer performance from both OSV and OIC segments.

Widening FY17-18E CNL by 23%-55% to RM38.9m and RM29.9 respectively assuming; (i) lower charter rates for wholly-owned vessels, (ii) higher operating costs, and (ii) lower contribution from subsea services/ OIC segment. Meanwhile, we are still maintaining FY17-18E vessel utilisation rate of 50-55%.

Debt restructuring update. 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. Following that, the second CDRC creditors meeting was held on 31 October to present the revised proposed PRS after incorporating comments from all lenders. Apart from its RM171.4m 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.RM380m corporate guarantees to respective JV & associates as of 3Q17.

Maintain UNDERPERFORM call. Pending a clearer restructuring plan and coupled with lack of reprieve in the near term, we maintain our UNDERPERFORM call with lower TP of RM0.070 from RM0.080 pegged to valuation of 0.1x FY18E PBV post earnings downgrade. Such valuation is still below the sector’s average and in line with PERISAI (Not-Rated)’s valuation, factoring in potential liquidation risk.

Upside risk: (i) Better-than-expected OSV and underwater services division, (ii) Higher-than-expected margins on vessels, and (iii) Fasterthan-expected recovery in OSV market.

Source: Kenanga Research - 27 Nov 2017