Investment Highlights

• We maintain our HOLD call on Velesto Energy but with a higher fair value of RM0.34/share (from RM0.24/share earlier), by removing the 30% discount to its book value.

• Velesto has secured 4 fresh jack-up rig charters worth US$105mil (RM432mil), which have tenures of 1 year with 2 annual extension options, from Petronas Carigali as follows:

• US$25.4mil or US$70K per day for Naga 2 and Naga 3, both commencing in April/May 2019.

• US$26.2mil or US$72K per day for Naga 5, commencing in April/May 2019.

• US$27.6mil or US$76K per day for Naga 6, commencing in June/July 2019.

• As Naga 2, 3 and 5 have fallen out of charter in 1Q2019, this means that the group’s rig utilisation could drop from 91% in 4QFY18 to 60% in 1HFY19, which could mean below breakeven levels.

• By end-August this year, the Naga 4 rig charter will expire while there could be a short gap for Naga 7 in 2QFY19 before continuing another 6 months with Shell.

• Additionally, the Naga 8 charter for Hess expires in November 2019 unless the client opts to extend the charter until May 2020.

• As such, we maintain our forecasts for now pending further clarity on the group’s rig utilisation trends for its fleet of 7 rigs on a longer term trajectory.

• While these new contracts are positive for the stock, we remain cautious on a sustainable re-rating 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.

• Hence, against the backdrop of still volatile earnings prospects shackled to a rig market which is still struggling to recover from below 60% regional utilisation levels, we view the 9% share price discount to its book value as justified.

Source: AmInvest Research - 23 Apr 2019