Investment Highlights

• We maintain our HOLD call on Velesto Energy with an unchanged fair value of RM0.24/share, based on a 25% discount to the revised book value of RM0.32/share. As a comparison, Malaysia Marine & Heavy Engineering, which has a net cash of RM0.40/share, is currently trading at half its book value.

• Velesto’s 9MFY18 loss of RM33mil was a disappointment vs. our earlier FY18F loss of RM29mil and street’s net profit of RM3mil. Excluding a forex gain of RM14mil, Velesto would have registered an even worse loss of RM47mil.

• As 4QFY18 rig utilisation is likely to deteriorate in tandem with the year-end monsoon season, we have cut our rig utilisation assumptions, which almost doubles Velesto’s FY18F loss, reverses FY19F net profit to a slight loss and cut FY19F earnings by 37%. As expected, no dividend was declared due to the losses.

• Velesto’s 3QFY18 revenue rose 34% QoQ to RM150mil as rig utilisation rate rose to 75% from 59%, with only 2 rigs enjoying full utilsation. This reduced the group’s 3QFY18 loss by 44% to RM14mil.

• While Velesto’s 9MFY18 loss has sharply improved, down by 79%, we remain pessimistic on the group’s prospects for a substantive earnings rebound which could catalyse a share price rerating.

• The group’s rig utilisation outlook remains uncertain as 5 rigs – Naga 2, 3, 4, 5 and 7 – do not have long-term charters. Naga 3, 4, 5 and 7 have secured fresh short-term charters amid expectations for further improvements in rig utilisation rates together with the gradual pace of recovery in global offshore drilling activities.

• However, with Brent crude oil price having fallen below US$70/barrel, we expect most of these new replacement contracts to be short term in duration amid heightened price uncertainties.

• Even full utilisation at current unexciting rates will mean that Velesto will continue to be just breaking even, notwithstanding the group’s efforts to draw further cost efficiencies with a stronger credit profile amongst suppliers and financiers.

• Against the backdrop of weak earnings prospects shackled to a weak market outlook, we view the 25% share price discount to its book value as justified.

Source: AmInvest Research - 26 Nov 2018