We are positive on the latest development of PRS securing 87% consent from lenders/financiers, taking it a step closer to alleviating its immediate insolvency risk. However, ALAM ultimately has to secure more contracts to generate sufficient cash flows for its operations. All in, we made no changes to our forecasts and reiterate UNDERPERFORM with a higher TP of RM0.120 pegged to 0.2x FY18E PBV.

87% consent from lenders/financiers on PRS. Last Friday, ALAM announced that the company and its subsidiaries, joint-venture companies and associated companies had received the requisite approval-in-principle to date from the respective lenders/financiers of 87% of the secured debt and the requisite approval-in-principle representing 100% of the unsecured debt. ALAM’s proposed restructuring scheme (PRS) is deemed effective subject to: (i) award of contracts, (ii) consent of shareholders, and (iii) completion of the bilateral settlement documentation within 60 days from 30th March 2018.

We are positive on the announcement as it marks a step closer for ALAM to restructure its debt portfolio. While ALAM has yet to disclose material terms of the PRS, the restructuring should involve bilateral settlement between each borrowing entity and its respective lenders/financiers by amending and extending the terms and conditions of the existing borrowing/facilities based on their respective cash flow forecast. However, ALAM could only successfully deliver its restructuring plan if they are able to secure more contracts. We understand that ALAM has tendered for Petronas’ integrated logistics control tower (ILCT) project requiring various types of vessels with tenures of 3+2/5+2 years. The contract is supposed to commence in 1Q18 but is delayed with the existing contracts which expired end of last year being extended. We believe it could be awarded earliest by end 2Q18. Meanwhile, 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 of c.RM173m as well as c.RM252m in corporate guarantees to respective JV & associates as of 4Q17.

No near-term reprieve in sight. The OSV segment is expected to stay challenging in 2018 despite stabilisation of crude prices given that the market is still flooded with idle young vessels. As such, we do not foresee a strong recovery in charter rates in the near term.

No changes to our current forecasts as we have factored in RM150m contract win with an average utilisation of 55%. With that, we still believe ALAM could register losses of RM69.7m in FY18 which will subsequently narrow to RM42.2m losses in FY19 assuming 12% growth in revenue backed with better utilisation at 60%.

Maintain UNDERPERFORM call with higher TP. Pending a clearer restructuring plan, we maintain our UNDERPERFORM call with higher TP of RM0.120 from RM0.060 pegged to valuation of 0.2x FY18E PBV (from 0.1x) in view of lower insolvency risk. Such valuation is still below the sector’s average but higher than with PERISAI (Not-Rated)’s valuation, factoring in potential liquidation risk.

Upside risks are: (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 - 2 Apr 2018