Investment Highlights

• We maintain our HOLD call on Velesto Energy with an unchanged book value-based fair value of RM0.34/share. Any near-term rerating remains a low probability given that rig charter rates remain weak while the group’s huge share base will dilute any incremental earnings from higher asset utilisation.

• As we had forewarned in our past reports, Velesto registered a 1QFY19 core loss of RM23mil due to a sharp drop in rig utilisation vs. a 4QFY18 core net profit of RM26mil.

• As rig utilisation could rise on the recently secured 4 charters, we expect a stronger 2HFY19 which could translate to an earnings rebound.

• As such, we view the results as within our expectations but below consensus. Note that we are projecting an FY19 breakeven vs. consensus’ median net profit of RM24mil.

• Velesto’s 1QFY19 revenue dropped 33% QoQ to RM127mil as rig utilisation rate sank to 66% with only 5 rigs operating from a near-fully utilised 91% in 4QFY18. Slightly exacerbated by lower other income and provision reversal, this led to the loss in this quarter.

• YoY, the group’s 1QFY19 revenue rose 4% on a 1ppt rise in rig utilisation in contrast with core loss widening from RM13mil in 1QFY18, which benefited from lower operating costs and a RM4mil insurance claim.

• Last month, Velesto 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 for Naga 2, 3, 5 and 6 commencing in April to July this year.

• Naga 2, 3 and 5 have fallen out of charter in 1Q2019, which means that the group’s 2QFY19 rig utilisation could remain around 66% that will translate to further losses.

• By end-August this year, 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, Naga 8 charter for Hess expires in November 2019 unless the client opts to extend the charter until May 2020.

• As this quarterly loss reaffirms our view that rig operators’ earnings trajectory is still uncertain, we remain cautious on a sustainable rerating for the stock pending an analyst briefing later today. Hence, against a regional rig market which is still struggling with below-breakeven utilisation levels of around 60%, we view the 14% share price discount to its book value as justified.

Source: AmInvest Research - 23 May 2019