Alam Maritim’s 1HFY14 core profit  of MYR34m  was below expectationsdue  to  poor  utilization  in  the  OSV  segment  and  weak  margins  in  the subsea  division.  Maintain  NEUTRAL,  with  a  lower  MYR1.35  FV  (from MYR1.66)  given  the  higher  share  base  and  15%/10%  cuts  in FY14F/FY15F  forecasts.  We  believe  earnings  volatility  and  execution risk may offset any potential re-rating catalysts or synergistic tie-ups. 

Below  expectations.  The  1HFY14  core  profit  of  MYR34m  made  up39%/36%  of  our/consensus  full-year  estimates.  The  70%  surge  in revenue  in  the  subsea/offshore  installation  and  construction  (OIC) services  unit  did little to soften  the impact  of  low fleet utilization,  which caused  a  27%  drop  in  offshore  support  vessel  (OSV)  revenue  and 900bps  narrowing  of  OSV  margins  to  7%.  Contributions  from  joint ventures  in the OSV and OIC segments weakened.  On the bright side, 2Q14 margins improved after a seasonally weaker 1Q14.

Strengthening  its  subsea  division.  Alam  intends  to  acquire  a  diving support vessel to beef up its subsea division  to complement  its remotely operated vehicles (ROVs). This is mainly to  better  equip itself to bid for long-delayed  c.MYR2bn  worth  of  inspection,  repair  and  maintenance (IRM) contracts potentially to be dished out by Petronas.

Forecast  changes.  We  cut  our  FY14F/FY15F  earnings  estimates  by 15%/10% to incorporate the lower-than-expected fleet utilization (vs 85% in FY13) and slower contract replenishment. Alam’s 2013  annual  reportstated  that  31  out  of  its  44  vessels  are  on  long-term  charters,  which implies that as high as 30% of its fleet  may face uncertainty in garnering favourable charter rates upon contract renewal.

Maintain  NEUTRAL,  with  FV  adjusted  to  MYR1.35  from  MYR1.66, pegged  to  an  unchanged  14x  FY15F  P/E,  in  line  with  the  14x-16x  for OSV/servicing  companies  within  our  coverage.  We  lower  our  FV  to reflect  a higher 924m  share  base  upon completion of a 15% placement to  a  major  shareholder  related  to  Hong  Leong  Group  in  June.  While potential  contract  wins  and  strategic  tie-ups  (leveraging  on  its shareholders’  network)  could  provide  ample  opportunities  in  terms  of synergy,  we  are  still  NEUTRAL  as  we  believe  the  execution  risks  and earnings volatility may offset these re-rating catalysts.

Risks. Partnership and execution risks as well as weaker OSV margins. 

Source: RHB