This article first appeared in The Edge Financial Daily on August 29, 2017 - September 4, 2017

Alam Maritim Resources Bhd
(Aug 28, 19 sen)
Maintain underperform with an unchanged target price (TP) of eight sen: Despite turning profitable with a meagre profit of RM1.7 million in the second quarter of financial year 2017 (2QFY17), we still expect FY17 to continue as a loss-making year owing to weaker charter rates and lower vessel utilisation in the second half of FY17 (2HFY17).

Pending a clearer restructuring plan and coupled with no reprieve in the near-term outlook, we maintain our “underperform” call with an unchanged TP of eight sen pegged at a valuation of 0.1 time FY18E (estimate) price-to-book value, which is still below the sector’s average and in line with Perisai Petroleum Teknologi Bhd’s valuation.

1HFY17 core net loss of RM8.5 million came at 27%/50% of house/street’s full-year net loss forecasts. This is within our expectations as we expect a weaker 2HFY17 due to weaker charter rates and vessel utilisation. No dividend was declared as expected.

Alam Maritim climbed back to the black with a core net profit of RM1.7 million in 2QFY17 from RM10.1 million losses in 1QFY17 due to 1.7 times jump in revenue as a result of better vessel utilisation and higher offshore installation construction (OIC) revenue leading to higher operating margins and improvement in joint-venture (JV) associates’ earnings.

Year-on-year, Alam Maritim’s earnings slipped by 14% or RM300,000 from RM2 million earnings in 2QFY16, dragged by a 35% decline in revenue, but offset by lower interest expense and stronger JV and associate earnings.

Cumulatively, 1HFY17 core loss widened by 7% to RM8.5 million from RM7.9 million losses in 1HFY16 as a result of poorer performance from both offshore support vessel (OSV) and OIC segments.

The current challenging OSV segment is expected to be extended this year given slower contract awarding in the OSV space. Therefore, we maintain our FY17 to FY18E losses at RM31.3 million and RM19.3 million respectively, assuming FY17 to FY18E vessel utilisation of 50% to 55%.

Recall that Alam Maritim had received a letter of approval from the Corporate Debt Restructuring Committee (CDRC), which required it to submit a restructuring scheme within 60 days. Alam Maritim presented a proposed restructuring scheme to CDRC on Aug 11 and the first CDRC creditors meeting was held on Aug 22.

Apart from its RM151.7 million total borrowings, note that Alam Maritim has contingent liabilities, comprising bank and performance guarantees for contracts entered into with customers, at RM40.8 million as well as about RM400 million corporate guarantees to respective JV and associates.

Upside risks include a better-than-expected OSV and underwater services division, higher-than-expected margins for  vessels, and a faster-than-expected recovery in the OSV market. — Kenanga Research, Aug 28