Alam ... Jun10

CIMB Research Report Investment highlights

• Maintain BUY.
Setia Ulung, a vessel belonging to Alam, has been served a warrant of arrest and a writ of summon by Singapore-based MLC Barging (MLCB) which claims that it is the sole owner of the vessel. We spoke to Alam’s management who maintains that MLCB’s claim has no merit as the Alam-CIMB Private Equity JV is the lawful registered owner of the vessel and the vessel is fully paid for. As the vessel is without a contract, we maintain our earnings forecasts and target price of RM2.38, pegged to a P/E of 10x. This is in line with our target P/E for Petra Perdana’s (PETR MK, Outperform) marine support business. Alam remains a BUY, with the potential re-rating catalysts being 1) fleet expansion, and 2) a successful pipe installation venture.

• Fallout between sister companies?
To recap, in FY07, Alam worked with MLCB on the purchase of ten vessels. For the purchase of Setia Ulung, management said that it dealt with MLCB’s sister company MLC Shipping Sdn Bhd. While all parties involved are still in talks, it appears the legal action may stem from an internal disagreement between MLCB and MLC Shipping.

• Management has a reasonably good case.
Management is of the opinion that there is no merit in MLCB’s claim. Also, it is confident that the JV has a reasonably good case and defence against MLCB based on these facts 1) The JV is the lawful registered owner of the vessel under the Malaysian Registry and documentation has been completed, and 2) Payment for the vessel, which costs about US$20m, has been fully settled. Delivered two weeks ago, the 5,220HP vessel has yet to be awarded a contract.

Recent developments
In addition to Setia Ulung, Alam has accepted delivery of two other vessels, namely
Setia Aman and Setia Qaseh, this quarter. The new assets take Alam’s fleet to 36
vessels (Figure 3) of which around 70% are on long-term charters lasting more than a
year. Between now and 1Q11, the company will accept delivery of four new vessels
(Figure 4) which will expand Alam’s fleet capacity by 21% to 201,104HP.

Earnings outlook
Gunning for RM1.5bn contracts. Armed with its growing fleet, Alam plans to enter
the race for 5-year, RM1.5bn offshore maintenance contracts, of which 60% will involve marine spread and the remaining will entail maintenance services for various
offshore structures. Bids are expected to be submitted in 2Q-3Q10. We understand
that they will be umbrella contracts offered by Petronas and its partners.

Venture with Swiber. In Dec 09, Alam and Singapore’s Swiber (SWIB SP, Outperform) teamed up to form a JV company, Alam Swiber Offshore, to venture into offshore installation and construction in the region. The JV is expected to accept delivery of an installation barge by this month. We understand that the JV has yet to secure a contract. SapuraCrest (SCRES MK, Outperform) is the leader in the pipe installation segment and a tough one to beat. We have yet to impute any contribution
from Alam’s pipe installation venture.