Alam Maritim Resources - Extension contract for workboats

News      Yesterday, Alam Maritim Resources Bhd (“ALAM”) announced that its two workboats (which were awarded a Petronas Carigali contract in May-2012) had been awarded the extension portion of the contract. 

Valued at around RM70.8m, the current contract is valid for a year.

Comments    We note that the current estimated contract rate implies a slightly higher daily charter rate (DCR) of RM96.9k versus the previous RM83.2k. However, we suspect this could be due to the inclusion of certain other items like catering, which were not included in the previous contract. 

Assuming a 20%-25% net margin and a c.50% stake (as both workboats are co-owned with CIMB (49%) and Bank Pembangunan (60%) respectively) the contract will yield a net profit of around RM7.1m-8.9m. (100% will be RM14.2m-RM17.7m). 

While we are positive on the extension of this contract as it shows Alam’s ability to continue winning contracts, we had already assumed higher utilisation rates (80% and 83%) for the OSV segment in 2013-14, which would have accommodated this contract extension. As such, we remain neutral on the stock for now. 

Outlook    We believe the OSV market is finally turning around and expects it to remain vibrant (similar to the heightened activity seen in 2007-2008) and as such, the stock is likely poised for a re-rating.

A buoyant future outlook is seen with further OSV awards expected from the other PSC players such as Murphy Oil. (Market talk is that there will also be more awards from PCSB as well).

Catalysts for the stock will be higher contract flows for its Underwater Services division (OIC and Subsea), which we are currently projecting only a single-digit operating profit in 2013.

Forecast    Maintaining FY12-14E earnings. 

Rating    Maintain OUTPERFORM

Valuation     Our unchanged TP of RM1.09 is based on a targeted PER of 12x on the FY13 EPS of 9.2 sen.  

Our ascribed PER is justified given that it is still at a discount to ALAM’s 2-year forward average PER of 12.6x and its peak of 19.0x seen in 2007-2008. 

Risks     1) A sudden slowdown in OSV contracts going ahead; and 

2) a lower than expected contract wins for ALAM’s underwater division. 

Source: Kenanga