FY17 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 FY18E losses by 1.3x and maintain our UP call with a lower TP of RM0.060 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. After stripping off; (i) RM26.7m net impairment on receivables, (ii) RM14.9m impairment on fixed assets, and (iii) RM22.2m impairment on JV, FY17 core net loss (CNL) of RM101.8m came below expectations at 264%/293% of house/street’s 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.

Deeper losses in 4Q17. ALAM‘s 4Q17 CNL widened by 3.6x QoQ to RM76.6m despite revenue inching by merely 2% due to widening (2.3x) losses from offshore marine segment led by weaker vessel utilisation overwhelming stronger sub-sea services/OIC segment (+80%; higher work orders). YoY, ALAM narrowed its CNL by merely 3% despite revenue strengthening by 56% from (i) better sub-sea services/OIC segment (RM12.4m profit vs RM18.4m losses in 4Q16) masking deteriorating offshore marine division, which widened its operating losses by 1.7x as a result of lower charter rates and vessel utilisation. Cumulatively, FY17 core loss widened by 26% to RM101.8m from RM81.1m losses in FY16 as a result of poorer performance from OSV segment (widening losses by 3.1x) offsetting sub-sea services/OIC segments (RM16.4m profit vs RM26.0m losses).

Widening FY18E CNL by 1.3x to RM69.7m assuming; (i) lower charter rates for wholly-owned vessels, (ii) higher operating costs, and (ii) lower contribution from subsea services/ OIC segment. Meanwhile, FY19E net loss of RM42.6m (narrowed by 42% YoY) is introduced assuming vessel utilisation of 60%.

Debt restructuring update. Recall that ALAM had received a 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 RM148.5m total borrowings, note that ALAM has contingent liabilities, comprising bank and performance guarantees for contracts entered into with customers, credit facilities at c.RM173m as well as c.RM252m corporate guarantees to respective JV & associates as of 4Q17.

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 RM0.060 from RM0.070 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 risks; (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 - 1 Mar 2018