Investment Highlights

• We maintain our HOLD call on Velesto Energy with an unchanged fair value of RM0.24/share, based on a 30% discount to its book value RM0.34/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.

• Excluding impairments of RM11mil and forex gains of RM14mil, Velesto’s FY18 core loss of RM20mil was better than our and market expectations. Hence, we have raised FY19F earnings to a breakeven level from an earlier loss of RM6mil. As expected, no dividend was declared due to the losses.

• Contrary to our earlier expectations for a weaker 4QFY18 results due to the year-end monsoon season, we are pleasantly surprised by rig utilisation rising to 91% from 75% in 3QFY18.

• However, we do not expect any near-term rerating for the stock given that rig charter rates remain low while the group’s huge share base will dilute any incremental earnings from higher asset utilisation.

• Velesto’s 4QFY18 revenue rose 26% QoQ to RM189mil as rig utilisation rate rose 16ppts to 91% which led to earnings rebounding to RM15mil from an earlier loss of RM14mil.

• While Velesto’s FY18 core loss has sharply improved from an FY17 loss of RM138mil with rig utilisation rising slightly by 3ppts to 73%, we remain pessimistic on the group’s prospects for a substantive earnings.

• The group’s rig utilisation outlook remains uncertain as 3 rigs – Naga 2, 3 and 5 – still do not have long-term charters. Naga 3 and 5 will fall out of charter in 1QFY19, which could lead to a utilisation rate of 60% if they are unable to secure fresh contracts and a reversion to a loss.

• Assuming a higher rig utilisation at 90% at current rig charter rates vs. our assumption at 70% will translate to a high PE of over 30x, based on our unchanged fair value.

• Hence, against the backdrop of weak earnings prospects shackled to a weak market outlook, we view the 32% share price discount to its book value as justified.

Source: AmInvest Research - 28 Feb 2019