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 30x – comparable to its 5-year peak.

• However, we have further raised FY19F–FY21F earnings by 20%–5% on higher charter rate and rig utilisation assumptions following the analyst briefing last Friday. These are the salient highlights:
  • Naga 3's Special Periodic Survey (SPS) for maintenance was rescheduled earlier from 3QFY20 to 22 November this year due to Petronas' well requirements. As we highlighted last week, this rig will not be earning charter rates over the 6–8 weeks in which maintenance is being carried out in Singapore on a zero-rated basis.
     
  • With Naga 7 also undergoing a scheduled 4-week SPS, we estimate that the group's overall rig utilisation could drop to 87% in 4QFY19 from 92% in 3QFY19. This could mean that 4QFY29 revenue could decrease by 40% QoQ to RM20mil. Even so, this could still be a commendable performance compared to a RM10mil loss in 1HFY19.
     
  • The group remains optimistic that Petronas' rig requirements will remain at 16–17 units as guided by its 2019–2021 Activity Outlook. Hence, management is confident that Naga 4 and Naga 7 rigs, which require new contracts by 2QFY20 and 4QFY20 respectively, will be able to secure new charters which are currently under negotiations.
     
  • Velesto also expects to extend Naga 3 charter with Petronas Carigali by 3QFY20 at higher market rates vs. its existing DCR. Likewise, the group expects all 4 charters from Petronas Carigali, which were secured in April this year, to be extended on higher rates.
     
  • Currently, 14 of the rigs in Malaysia have been chartered out, which indicate a strong utilisation rate of 93%, well above Southeast Asia's 70%. Management views that the 9 rigs cold stacked in Singapore and 3 in Labuan, owned by foreign operators, will face hurdles in securing jobs given that each will require additional capex of US$10– 15mil to be reactivated.
     
  • Even though Petronas is projecting lower activities from hydraulic workover units (HWU), management expects stable demand for its 4 units given that 15–20 wells may need to undergo "plug and abandonment" decommissioning operations next year. Nevertheless, this remains a minor portion of drilling activities, contributing 3% to 3QFY19 revenue.

• While Velesto’s FY21F PE of 25x may appear high, this is justified given the inflective earnings escalation following years of negative sentiments.

Source: AmInvest Research - 2 Dec 2019