Investment Highlights

• We maintain our HOLD call on Velesto Energy with unchanged forecasts and book value-based fair value of RM0.34/share given a flattish regional rig charter rate trajectory while the group’s huge share base will dilute any incremental earnings from higher asset utilisation.

• We remain cautious on Velesto’s earnings trajectory notwithstanding improving operational dynamics, as highlighted by an analyst briefing today:

• Rig charter rates are slightly improving, with Velesto’s daily charter rates rising by US$1K QoQ and YoY to US$69K in 1QFY19 due to rising regional demand and supported by more favourable contractual terms.

• Utilisation for Velesto’s fleet of 7 rigs fell to 66% in 1QFY19 from 91% in 4QFY18 due to temporary gaps between job assignments and 5 yearly special periodic surveys (SPS) for maintenance and overhaul, principally for Naga 2, 3, 5 and 6.

• As mentioned in our report earlier today, Velesto’s 2QFY19 rig utilisation is likely to remain below breakeven levels at 70% given that Naga 2, 3, 5 and 6 will be partly out of charter due to SPS or awaiting the commencement of new contracts.

• We expect earnings to recover in 3QFY19 with rig utilisation of over 85% as only Naga 7 will be out of charter from Murphy and undergoing SPS for 5 months until Dec this year. If the rig manages to secure a short-term charter from a nearby field operator, the utilisation level will surge above 90%.

• While Naga 4 could drop out of Roc Oil’s charter in November this year, the group may be looking to negotiate a short-term option extension with its existing client or a longer term contract with other operators.

• All in, this will mean that FY19F rig utilisation could be better than the 70%–73% achieved in FY17–FY18, but still below 80% at near breakeven levels. Hence, we maintain our FY19F breakeven vs. consensus’ median net profit of RM24mil.

• However, visibility for rig utilisation recovery is improving in FY20F with levels likely to reach above 80%, as Naga 8 charter from Hess expires in April next year while 2 charters are expiring only towards 4QFY19 — Naga 7 and 4 contracts will be completed in October 2020 and November 2020 respectively.

• Outstanding order book of RM1.5bil (including RM0.9bil options) and tender prospects worth RM2.3bil (32 shorter term and 7 long term charters) underpin longer term earnings prospects.

• Against a regional rig market which is still struggling with below-breakeven utilisation levels of under 70%, we view the 14% share price discount to its book value as justified.

Source: AmInvest Research - 23 May 2019