Alam Maritim Resources Bhd 
(March 22, 31 sen)
Upgrade to market perform with a higher target price of 31 sen: Alam Maritim Resources Bhd has announced that its wholly-owned subsidiary, Alam Maritim (M) Sdn Bhd, had been awarded a contract for the provision of subsea inspection, maintenance and repair (IMR) services by an independent oil and gas exploration and production company. The contract is valued at about RM99 million for two years with an extension option for another year.

The contract award is positive to Alam Maritim Resources, marking the second contract award announcement in 2017. Recall that Alam Maritim Resources is the incumbent for this project, securing RM182 million IMR works for 3+1 years back in 2013. The smaller contract value of RM50 million per year (versus RM60 million per year) is not surprising given aggressive industry-wide cost reduction in recent years amid industry downturn. We forecast the contract to fetch 10% earnings before interest and tax (Ebit) margin, lower than its historical 15% Ebit margin during better times. Assuming Ebit margin of 10%, we estimate the contract will contribute RM5 million Ebit per annum.

The offshore support vessel (OSV) segment is expected to stay challenging in 2017 despite stabilisation of crude prices given that the market is still flooded with idle young vessels. As such, we do not foresee a strong recovery in charter rates in the near term. On the other hand, we reckon margins for the underwater services segment are under pressure and will be hit by low asset utilisation in its pipe-lay barge and diving support vessel as the contracts secured are mostly short-term, thereby creating time gaps in between jobs (one to two months).

With the newly secured contract, it brings the year-to-date win to RM133 million, accounting for 89% of our RM150 million order-book replenishment assumption in the financial year ending Dec 31, 2017 (FY17). We maintain our earnings forecast (loss of RM27.3 million/RM14.8 million in FY17/FY18 assuming vessel utilisation of 55%/60%).

With the recent share-price resilience despite the short-term pull-back in oil prices, we reckon that negatives could have priced in and downside risk is limited from current level as a result of improved sentiment. Hence, we raise our valuation to 0.4 times forward price-to-book value from 0.3 times previously, which is still below the sector average due to oversupply issue. However, take note that earnings recovery could be slower than other subsegments as increase in vessel utilisation could be at the expense of charter rates. — Kenanga Research, March 22