Alam Maritim job wins point to OSV space recovery

This article first appeared in The Edge Financial Daily, on June 28, 2018.
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Alam Maritim Resources Bhd
(June 27, 14 sen)
Upgrade to market perform with a higher target price (TP) of 13 sen:
On Tuesday, Alam Maritim Resources Bhd made its first contract announcement of the year with wins worth RM226.1 million for the provision of offshore support vessels (OSVs) to Malaysian and Middle Eastern oil and gas players. These contracts comprise short- and long-term contracts with time periods varying from six months to three years, extendable for another one to two years at the discretion of the clients.

We were positively surprised as the total size of contracts secured was 50% more than our financial year ending Dec 31, 2108 (FY18) replenishment target of RM150 million, and higher than FY16’s and FY17’s cumulative contract wins of RM83 million and RM179 million, indicating positive recovery within the OSV space backed by healthier oil prices.

Furthermore, the contract wins would contribute positively to its ongoing debt restructuring scheme whereby one of the requirements for the scheme was for it to secure contracts — consequently lowering the risks for liquidation. We reckon that the contracts would fetch an earnings before interest and tax (Ebit) margin of about 8%, lower than the historical margin of 15% during its heydays.

To recap, Alam Maritim had received the requisite approval-in-principle from the respective lenders (87% from secured debt holders and 100% of the unsecured debt holders) to undergo its proposed restructuring scheme (PRS). That said, the PRS is only deemed effective subject to award of contracts (met on Tuesday), consent of shareholders, and completion of the bilateral settlement documentation with lenders within 60 days from March 30, 2018 (pending updates).

As of the first quarter ended March 31, 2108 (1QFY18), Alam Maritim had RM135.6 million worth of borrowings and contingent liabilities comprising bank and performance guarantees for contracts entered into with customers and credit facilities of about RM190 million as well as about RM252 million in corporate guarantees to respective joint ventures and associates.

While contract flows might be improving, we believe the OSV segment’s charter rates might still be depressed as the market is still crowded with idle young vessels. That said, we are narrowing FY18 estimate (FY18E) and FY19E core net loss by 10% and 11% to RM69.6 million and RM41.5 million after upgrading our FY18E and FY19E replenishment assumptions to RM250 million each from RM150 million previously, with higher average OSV utilisation rates of 60% and 65% against 55% and 60% previously.

We upgrade our call to “market perform” from “underperform” with a higher TP of 13 sen from 11 sen as we roll valuations forward to FY19 and peg it higher at 0.25 times to price-to-book value from 0.2 times, given lower liquidation risks post contract awards. We believe our upgrade call is justifiable given the size of contracts won on Tuesday, which is relatively substantial compared with Alam Maritim’s cumulative contracts won over the last two years.

Nonetheless, we note that our applied valuations are still below the sector’s average given its volatile earnings and depressed charter rates. The upside risks are better-than-expected OSV and underwater services division, higher-than-expected margins on vessels, and faster-than-expected recovery in the OSV market. — Kenanga Research, June 27