9M18 posted widened losses from lower OSV utilisation and undersea services projects. Meanwhile, ALAM has also secured two new undersea services contracts – its second win in the year, bringing YTD wins to c.RM376m, while it has also completed its debt restructuring under CDRC. However, we remain cautious over its high off-balancesheet obligations and depressing charter rates. The stock is now a NOT RATED, as we are ceasing active coverage.

Deemed broadly in-line expectations. ALAM posted 9M18 core net loss of RM40m (arrived after stripping-off forex and gains on disposals), which we deem to be broadly within our expectation of FY18 losses of RM69.6m, in anticipation of widening losses in 4Q, stemming from weaker contributions from offshore marine services and subsea services & offshore installation construction (OIC) segments. However, 9M18 losses seem to be wider than consensus’ forecast of RM52.2m losses, possibly due to an overestimation in its vessel utilisation. No dividends were announced, as expected.

Widening losses. 9M18 core loss widened 59% YoY, in tandem with the revenue decline of 47%, dragged by lower offshore support vessels (OSV) utilisation coupled with lower OIC/subsea projects. For the individual quarter of 3Q18, core loss of RM19.4m widened 16% YoY, also hit by lower OSV utilisation and subsea/OIC projects, masking lower finance costs. Sequentially, core losses similarly widened 46% QoQ from lower OSV contributions.

Secured underwater contracts. On a separate Bursa filing, ALAM announced the securement of five-year contracts for the provision of PAN Malaysia Underwater Services from: (i) Petronas Carigali, and (ii) Enquest Petroleum. No contract value was disclosed, as the actual value would depend on work orders received, but we estimate a contract value of roughly RM150m. We are positive on the contracts win, representing its second win for the year, and bringing YTD wins to c.RM376m, exceeding our replenishment assumptions of RM250m.

Completed debt restructuring. Meanwhile, the group has also completed its debt restructuring under the Corporate Debt Restructuring Committee (CDRC) of Bank Negara in September, which entails; (i) restructuring of repayment terms ranging from 1 to 7 years, (ii) financing rate capped at a maximum of 5%, and (iii) any proceeds from vessel sale will be used for debt repayments. All-in, this would mitigate immediate default and cash flow risks, buying time for the company to turn around. However, the company’s overall liabilities profile has not changed much. Currently, it carries total borrowings of RM128m on its balance-sheet, implying only 0.1x net-gearing. That aside, the company also has an alarming level of contingent liabilities and corporate guarantees totalling to RM453m. Including these, its implied net-gearing will surge to approximately 0.9x.

Cease coverage. Overall, while the recent contract wins and debt restructuring are definite positives, we still remain cautious over its alarming off-balance-sheet obligations, coupled with depressing charter rates. Post-contracts award, we lowered our losses assumption by 1- 12% for FY18-19E as we increased our FY18 replenishment assumptions to RM380m. Seeing a lack of institutional investors’ interests and reshuffling of our research resources, we are ceasing active coverage for now, transferring it to our retail coverage under our “On Our Radar” series. Should sentiment or outlook improve, we may seek to resume coverage in the future. The stock is now a NOT RATED (from MP previously), with our last TP of RM0.13 pegged to 0.25x PBV.

Source: Kenanga Research - 03 Dec 2018