With no reprieve in its near-term tepid outlook, we expect further selling pressure on the stock despite the extension granted by CRDC to submit a proposed restructuring scheme by 11 August. Should ALAM fail to comply, we do not discount the possibility of winding up petition being filed by sukuk holders/financiers. In view of higher insolvency risk, we keep our UNDERPERFORM rating on ALAM with a lower target price of RM0.08/share, pegging to 0.1x FY18 PBV.

Extension granted by CDRC. Yesterday, ALAM announced that CDRC has granted an extension of time to submit the proposed restructuring scheme till 11 August, Recall that on 25 May, ALAM had received letter of approval from CDRC, which requires it to submit a restructuring scheme within 60 days. The 60-day deadline was due on 24 July. With the successful extension of another 18 days, ALAM will continue to remain under the Informal Standstill Arrangement with the respective financiers/sukuk holders. Should ALAM fail to submit what is required by CDRC, we do not discount the possibility of the company following the footstep of PERISAI and Swiber, whereby a winding up petition might be filed by sukuk holders/financiers.

Missed sukuk principal payment. ALAM had missed the sukuk principal payment of RM30m due on 6 July. Note that Malaysian Rating Corporation (MARC) has placed the RM500m Sukuk Ijarah on MARCWatch Negative following the application to CDRC in May this year. Following the missed payment, MARC has further downgraded ALAM’s sukuk rating to D from BB+.

Another RM45m sukuk due in early 2018. ALAM has another sukuk principal repayment of RM45m due in Jan 2018. As of 1Q17, ALAM has cash and bank balances of RM37.5m and the sinking fund set aside has been reduced to RM11.7m from RM28.4m as of 4Q16. Going forward, we expect weak cash flows from operations to sustain given that ALAM is aiming to register revenue of between RM200m-300m backed by an order-book of RM390m.

Maintaining our current forecasts. The OSV segment is expected to stay challenging in 2017 given that the market is still flooded with idle newer vessels. As such, we do not foresee a strong recovery in charter rates in the near term. Therefore, we are maintaining our FY17-18E losses forecasts of RM31.3-19.3m assuming vessel utilisation of 50- 55%.

Reiterate UNDERPERFORM call. With no reprieve in the near-term outlook, we expect further selling pressure on the stock. Thus, we maintain our UNDERPEROFRM call with lower TP of RM0.08 from RM0.15/share previously, pegged to lower valuation of 0.1x FY18 PBV (from 0.2x), which is still below the sector’s average and in line with PERISAI’s valuation.

Risks to our call: (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 Jul 2017