Investment Highlights

• We maintain our BUY call on Velesto Energy with an unchanged fair value of RM0.46/share, based on an FY21F PE of 35x – comparable to its 5-year peak.

• Our FY19F–FY21F earnings have been raised by 16%–8% from a 5ppt increase in rig utilisation in FY19F together with a 2% increase in our average charter rate assumption.

• Velesto’s 9MFY19 core net profit of RM23mil came in above our expectations, accounting for 95% of our earlier FY19F earnings, but within consensus.

• The group’s 9MFY19 core net profit rebounded from a 9MFY18 core loss of RM47mil due to a 10ppt YoY increase in rig utilisation to 77% together with higher utilisation of hydraulic workover units (HWU),

• Likewise, Velesto’s 3QFY19F core net profit surged 3x QoQ to RM34mil while rebounding from a RM12mil loss in 3QFY18 as rig utilisation rates rose to 92% from 74% in 2QFY19 and 75% in 3QFY18, which was further supported by increased HWU utilisation.

• We caution that the group’s strong rig utilisation of 92% in 3QFY19, in which only Naga 6 had undergone a Special Periodic Survey (SPS) out of the 7 units in the fleet, may not recur in 4QFY19.

• Naga 3 and Naga 7 are currently undergoing a mandatory 5-yearly SPS which could mean 4–8 weeks of idle downtime. This could mean that 4QFY19 rig utilisation could drop to 85%, which should remain above breakeven for the group.

• As we had highlighted in September this year, rig charter rates are beginning to track upwards on tightening utilisation rates while older rigs are being retired amid slowing new units from China yards. In the North Sea, Borr Drilling has recently secured rig charter rates above US$100K vs. currently US$70K in Malaysia.

• Recently, Velesto secured a fresh charter at sharply higher daily rates of US$90-100k (excluding mobilisation charges) 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 to be deployed at Blck A-18 of the Joint Development Area administered by Malaysian-Thailand Joint Authority. This is 29%-32% higher than the US$70kUS$76k for the 4 fresh jack up rig charters worth US$105mil (RM432mil) which was secured in April this year.

• While Velesto’s FY21F PE of 29x may appear high, this is justified given the inflective earnings escalation following years of negative sentiments.

Source: AmInvest Research - 29 Nov 2019