Alam Maritim (Alam) received a letter of award from an independent oil & gas (O&G) exploration and production company for the provision of underwater services comprising subsea inspection, maintenance and repair. The contract worth RM182m will help the subsea division claw back into the black this year. Maintain Buy with FV at RM1.25. Alam is one of our favorite small cap stocks in the O&G sector. Winning streak continues. Alam announced that the contract, valued at approximately RM182m, is for a primary period of three years, with an extension option for another year. We understand that the job is expected to begin as early as next month. There could be more upside to the contract from the repair portion, as the RM182m allocated is only for inspection and 

maintenance services.

 

Earnings unchanged. This win is a positive swing for Alam’s subsea division as it would no longer be running at a loss, due to the lack of jobs, for the next three years. We estimate that the contract would earn the company some RM45m-RM50m in revenue in FY13. Assuming a net margin of 5%-10%, it would recognize a modest RM2m-RM5m in earnings for FY13. While this is 

positive news, we are leaving our earnings estimate unchanged as the contributions from this contract win will be offset by the potential losses from its offshore, installation and construction (OIC) division. 

 

Risk lies with its OIC division. With the lack of new jobs in its OIC division, Alam could register a loss of some RM4m-RM6m per quarter moving forward. While it intends to pitch to be one of the block concessionaries for the Pan Malaysian umbrella transport and installation contract, this would only materialize in 2H13 if it happens. Hence, its potential near-term catalyst would be a RM100m contract for ExxonMobil-Petronas Carigali’s Damar gas platform project in 2Q13, for which it is competing against TH Heavy Engineering. We believe that this division will likely register losses for at least two quarters (1Q13 and 3Q13) in FY13, due to the lack of jobs.

 

Maintain BUY. All in all, we are retaining our BUY recommendation on Alam Maritim, with its FV unchanged at RM1.25, pegged to 13x FY13 EPS. The stock remains as one of our top small-cap picks in the O&G sector besides Perdana Petroleum (PETR MK, BUY FV RM1.40), underpinned by: i) two more waves of long-term offshore supply vessel (OSV) contracts, ii) better long-term earnings 

visibility from its OSV division and subsea division (with this contract), and iii) potential offshore, installation and construction contracts.

 

Source: RHB