Alam Maritim secured two packages totalling MYR102m from Petronas FLNG1 and we believe there would be more packages as the vessel nears its 1Q16 operational start-up date; as a result we upgrade to TRADING BUY (from Neutral) with a MYR0.56 TP (from MYR0.36, 14% upside) based on 9x FY16F P/E. The company is currently focusing on getting more subsea jobs, which ought to enable it to utilise its own extensive OSV fleet.

Petronas FLNG 1 starting up. The world’s first floating liquefied natural gas (FLNG), owned by Petronas, is due to start operations in 1Q16. Owing to its subsea expertise, Alam Maritim Resources (Alam Maritim)has been one of the beneficiaries of this start-up. To date, the company was awarded two packages related to Petronas’ subsidiary PetronasFloating LNG 1 (L) Ltd (PFLNG1) totalling MYR102m. The first package was for the engineering, procurement, installation and related activities for the mooring system installation. The second package was for offshore works for final positioning as well as the hook-up of the mooring system. This included the installation for flexible risers, precommissioning and commissioning of pipelines, pipeline end terminalsand risers from the Kanowit fields to the PFLNG1 worth MYR53.3m.

There’s more in store? After the vessel has arrived, there would be further works to connect the riser to the external turret as well as hook up and commissioning works. We believe more packages are expected for the PFLNG1 project and Alam Maritim stands a good chance of winning these packages, considering it is doing most of the initial installation work.

Upgrade to TRADING BUY with MYR0.56 TP. We upgrade Alam Maritim to a TRADING BUY (from Neutral) as we believe more contracts related to the Petronas FLNG1 are likely to be announced soon. We increase our FY16F/FY17F earnings by 31%/32% respectively as we input higher orderbook wins for its subsea division. Our MYR0.56 TP is derived by pegging a higher FY16F P/E of 9x (from 8x) in light of the possibility of contract wins in the near future. The company’s strategy is to concentrate on winning more subsea jobs going forward , as this ought to enable Alam Maritim to utilise its own offsh ore support vessels (OSVs).

On Petronas FLNG. Petronas has two FLNG vessels, Petronas FLNG1 and Petronas FLNG2. The former is targeted for commissioning in the Kanowit field offshore Sarawak in 1Q16. Meanwhile, the latter vessel is targeted for commissioning in the Rotan field offshore Sabah in 2018. Petronas FLNG1 – the first FLNG in the world – is expected to cost the national oil company USD1.5bn.

Why FLNG? In a conventional LNG operation, the gas fields are near land. This makes it feasible for the hydrocarbons to be transported via pipeline to the onshore liquefaction plant. However, for stranded fields like the Kanowit gas field , which is 180km offshore Sarawak, building a pipeline would not be economical. This is where a FLNG comes into play. Such a vessel would be able to liquefy the natural gas in situ and the cargo would then be transported to its final destination by an LNG tanker.

FLNG installation. A FLNG is similar to a floating production, storage and offloading (FPSO) unit in terms of operation. An important point we would like to highlight is the external turret of the Petronas FLNG1. The vessel would be moored via an external turret, which allows the vessel to rotate around the turret for weathervaningmanoeuvres. Besides a pivot point, the turret also serves as a connector for the riser and umbilicals from the well heads on the seabed to the vessel.

Where Alam Maritim comes in. The external turret for the Petronas FLNG1 wouldbe held in place by anchor chains and anchor piles to the seabed. Once it is secured in place, risers and umbilicals from the well heads would then be connected to the turret. This is where Alam Maritim comes in with its capability and track record in subsea installation works.

Petronas FLNG1 packages so far. In June, Alam Maritim announced it won the first package of Petronas FLNG1 installation. The first package was for the engineering, procurement, installation and related activities for the mooring system installation worth MYR49m. In October, Alam Maritim was awarded the second package.This involved offshore works for final positioning as well as the hook-up of the mooring system, which includes the installation for flexible risers, pre-commissioningand commissioning of pipelines, pipe-line end terminals and risers from the Kanowit fields to the Petronas FLNG1 worth MYR53.3m.

More coming up? Note that the first two packages for the FLNG are for site preparations and riser installation. Once the vessel is ready and has arrived at the location, there is still the matter of anchoring the vessel through its external turret as well as hooking up and installing the vessel’s risers. Therefore, we believe there would be a few more packages coming up soon as, according to Petronas, the Petronas FLNG1 is expected to deliver its first cargo in 1Q16.

Splash zone contract. In July, Alam Maritim announced an award for the provisioning of splash zone structural repair and maintenance from Petronas CarigaliSB. The estimated value in the announcement was MYR6m for a period of two yars from June until Jun 2017. There is an extension option of one year. We understand from Alam Maritim that the contract is actually MYR6m per offshore structure and there are 34 offshore structures that are stipulated under the contract. This would bring up the total value of the splash zone contract to MYR204m. However, it is on a call-out basis. As such, we have not imputed any earnings from the splash zone contract, although we would like to point out the potential for earnings surprise from this.

MISC (MISC MK, BUY, TP: MYR11.04) another potential beneficiary. We did a calculation on the production and storage capacity of the Petronas FLNG1 and estimated that to fill up the storage capacity would take approximately 27 days. By that time, a liquefied natural gas (LNG) tanker would be needed to haul up the precious cargo to its final destination. The LNG shipping arm of Petronas, MISC, is also expected to be a beneficiary of the Petronas FLNG1, as the latter has readily available LNG tankers for deployment.

TRADING BUY with MYR0.53 TP. We raise our earnings for FY16F/FY17F by 31%/32% respectively as we input higher orderbook wins for Alam Maritim’s subsea division. Considering the operational start of the Petronas FLNG1 ought to be in 1Q16, we believe there would be more related packages for this vessel in the near future to be awarded. As such, we upgrade our recommendation for Alam Maritim to a TRADING BUY (from Neutral) with a MYR0.56 TP. Our TP is derived by pegging a higher P/E of 9x (from 8x) in light of the possibility of contract wins in the near future.

Historical multiples. We show in Figures 4 & 5 Alam Maritim’s historical P/E and P/BV averages. Our target P/E of 9x is a 24% discount to its historical average P/E of 11.15x. If we peg its historical P/E to FY16F EPS of MYR0.06, we arrive at a TP of MYR0.68. We believe the company deserves to trade at a discount to its historical P/E as – during the period of high oil prices – Alam Maritim’s OSV utilisation rate hovered at 85-90% vis-à-vis the current utilisation rate of around 45%. On a P/BVbasis, Alam Maritim is now trading at half of its book value of equity per share (BVPS) of MYR1.00. The historical average for its P/BV is at 1.34x and, if we use this multiple, we arrive at a TP of MYR1.34.