Despite narrower losses, we deemed 1Q18 results as below expectation as we expect larger losses from core businesses in the coming quarters. Pending a clearer restructuring plan and coupled with lack of reprieve in the near term, we widen our FY18-19E losses by 11% each and maintain our UP call with a lower TP of RM0.110 pegged to a valuation of 0.2x FY18E PBV.

Deemed below expectations. After stripping off RM4.1m unrealised forex losses, 1Q18 core net loss (CNL) of RM7.3m is deemed below expectation even at only 10%/14% of in-house/street’s forecasts as we expect larger losses in the coming quarters on weaker-than-expected contributions from offshore marine services and subsea services/offshore installation construction (OIC) segments. No dividend was declared as expected.

Narrower losses in 1Q18. ALAM narrowed its core losses by 91% QoQ to RM7.1m despite revenue falling 50% led by: (i) narrower losses in offshore marine services segment (-89%; lower operating costs), (ii) reduced losses from its associate and JV despite stripping off one-off impairment cost, and (iii) lower finance cost (-47%). YoY, its CNL narrowed by 28% from RM10.1m helped by: (i) narrower losses in offshore marine services segment (-42%; higher vessel utilisation and lower operating costs), and (ii) turnaround of subsea division to RM0.5m in operating profit from losses of RM0.2m.

Widening FY18-19E CNL by 11% each to RM77.4m-46.9m assuming; (i) lower charter rates for wholly-owned vessels, (ii) higher operating costs, and (ii) lower contribution from subsea services/ OIC segment.

Debt restructuring update. Recall that ALAM 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, while the deadline is end of this month. Meanwhile, apart from its RM135.6m total borrowings, note that ALAM has contingent liabilities comprising bank and performance guarantees for contracts entered into with customers, credit facilities of c.RM190m as well as c.RM252m in corporate guarantees to respective JV & associates as of 1Q18.

Maintain UNDERPERFORM call. Post earnings cut, we maintain our UNDERPERFORM call with lower TP of RM0.110 from RM0.120 pegged to valuation of 0.2x FY18E PBV pending a clearer restructuring plan and coupled with lack of reprieve in the near term. Such valuation is still below the sector’s average but higher than PERISAI (NotRated)’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 - 25 May 2018