Period

3Q15/9M15

Actual vs. Expectations

9M15 results came in below expectations with net profit of RM13.2m only making up 48.7% and 36.2% of our and consensus full-year forecasts, respectively.

The variance to our forecast is largely due to lower-thanexpected OSV vessel utilisation and higher-than-expected operating expenses on its high-end vessels.

Dividends

No dividend was declared as expected. Key

Results

Highlights

3Q15 CNP plunged 98.6% YoY to RM0.3m from RM19.0m due to lower overall vessel utilisation amid a slowdown in OSV market. While OSV revenue declined by 30.9% in 3Q15, the situation was worsened by weaker overall EBIT margin of 10.8% in 3Q15 from 12.5% in 2Q15 after stripping off an unrealised forex gain of RM18.8m.

On a QoQ basis, core earnings sank 96.4% due to net loss contribution from joint ventures despite improvement in OSV revenue (+25.7% QoQ) as a result of higher depreciation charge and finance cost on the diving support vessel.

9M15 core net profit slumped 75.0% YoY to RM13.2m from RM52.7m last year due to lower average vessel utilisation in both OSV segment and underwater services segment, which was largely reflected in the net loss contribution of RM6.1m from a profit of RM12.3m.

Outlook

Despite ALAM securing multiple underwater services projects, the overall underwater business segment margin was hit by low asset utilisation in its pipe-lay barge and its newly acquired diving support vessel as the contracts secured are mostly short-term ones thereby creating time gaps in between jobs (1- 2 months).

We came to understand that its pipelay barge will have to incur approximately RM2m/month (incurring depreciation) and we believe the mobilisation cost and low utilisation rate will crimp its margin despite individual projects being profitable.

The OSV segment is expected to be challenging in 2016 given the current adverse movement in crude oil prices. On top of that, existing charter contracts by the local OSV players are not expected to be spared the renegotiation of rates by Petronas.

We believe the impact should be more severe on vessels under high DCRs (>USD2.2/bhp).

Change to Forecasts

We cut FY15E/FY16E CNP by 59.6%/28.0% to RM10.9m/RM29.9m by factoring in: (i) average JV-owned vessel utilisation to 50%/60% from 55%/65% previously, and (ii) higher operating expenses by 5%/2% for higher specification vessels in FY15/FY16 to factor in weakness in the higher specification OSV market amid low oil price environment.

Rating

UNDERPERFORM maintained

Valuation

Our TP is reduced to RM0.32 from RM0.39 pegged to a lower target PBV of 0.4x from 0.5x previously, slightly lower than - 1.5SD below its 8-year mean to account for weaker prospects in the near-term.

Risks to Our Call

Upside Risk: (i) Better-than-expected OSV and underwater services division, (ii) Higher-than-expected margins on vessels, and (iii) Faster than expected recovery in OSV market.

Source: Kenanga Research - 26 Nov 2015