1H18 widened losses, stemming from poorer performance in its OSV segment, came in broadly within expectations. Moving forward, we will keep close watch on further updates regarding the group’s debt restructuring scheme, with execution of bilateral agreements expected by this month-end. Maintain MP and TP of RM0.13, after we previously upgraded our call post-contract award, thus fulfilling the first criteria of its PRS

Deemed broadly in-line with expectations. ALAM recorded 1H18 core net losses of RM20.6m (arrived after stripping-off forex and gains on disposal), which we deem to be broadly within expectations, in anticipation of widening losses in the coming quarters stemming from weaker contributions from offshore marine services and subsea services/offshore installation construction (OIC) segments. No dividend was announced, as expected.

Widening losses. 1H18 core losses widened by 2.4x YoY, due to greater losses contribution from JV and associates by 1.2x, coupled with widened operating losses from its OSV segment by 2.8x. As for the individual quarter, 2Q18 registered core losses of RM13.3m, deteriorated YoY from core profit of RM1.7m in 2Q17, caused by poorer performance from both segments of OSV and Subsea services/OIC. QoQ, ALAM’s core losses widened 83% from lower OSV utilisation (segmental losses widened by 46%).

In midst of debt restructuring. To recap, on 30 March 2018, ALAM had received the requisite approval-in-principle from their respective lenders (87% of secured debt holders and 100% of unsecured debt holders) to undergo their Proposed Restructuring Scheme (PRS). The PRS will only be deemed effective subject to: (i) award of contracts (met after contract award announced on 26 June 2018), (ii) consent of shareholders, and (iii) completion of the bilateral settlement documentation within 60 days from 30th March 2018 (pending updates), while the deadline for execution is end of this month. As at end-2Q18, ALAM had RM129.2m in total borrowings, as well as contingent liabilities comprising bank and performance guarantees for contracts entered into with customers, credit facilities of c.RM172m, and c.RM270m in corporate guarantees.

Maintain MARKET PERFORM, with unchanged TP of RM0.13, pegged to 0.25x FY19E PBV. We note that our ascribed valuations are still below average, given volatile earnings coupled with its uncertain outlook given the suppressed charter rates.

Risks to our call include: (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 - 3 Sept 2018