Investment Highlights

• We maintain our BUY call on Velesto Energy with a higher fair value of RM0.46/share (from an earlier RM0.37/share) based on a higher FY21F PE of 35x – comparable to its 5-year peak.

• This higher valuation stems from our increased FY20F–FY21F earnings by 12%–14% due to a 2% rise in our average charter rate assumption. Our FY20F–FY21F EPS are currently 13%– 18% above consensus.

• Velesto has secured a fresh charter worth US$131mil for its Naga 8 jack-up rig from Carigali Hess Operating Company for a firm 3-year period with 3 extension options of 6 months each.

• This premium independent-leg cantilever jack-up rig with an operating water depth of 400 feet will likely be deployed at Block A-18 of the Joint Development Area administered by the Malaysian-Thailand Joint Authority.

• Excluding mobilisation charges, this Naga 8 charter, which commences in 2H2020, translates to a substantively higher daily charter rate (DCR) of US$90–US$100K as compared with US$70K–US$76K for the 4 fresh jack-up rig charters worth US$105mil (RM432mil) secured in April this year.

• Recall that Petronas Carigali had awarded charters for Naga 2, 3, 5 and 6 which have commenced from April to July this year over tenures of 1 year with 2 annual extension options. This allows Velesto to negotiate at market rates during these extensions.

• That Carigali Hess was willing to accept a DCR increase of almost 30% for a long-term charter with Naga 8 supports our bullish view that the rig charter rate trajectory has shifted upwards after 4 years of low rig utilisation.

• While the Naga 4 charter will expire in March 2020, the group is confident and currently in advanced stages of securing a fresh contract.

• The next charter due to expire will be the Naga 7 contract in October 2020, which Velesto is aggressively bidding for a new job.

• This means that Velesto’s rig utilisation could rise on these new charters to over 90% on minimal rig down time amid improving charter rates, translating to stronger earnings growth trajectory in 2HFY19F and onwards.

• While Velesto’s FY21F PE of 30x may appear high, this is justified given the inflective earnings escalation following years of negative sentiments.

Source: AmInvest Research - 6 Nov 2019