Investment Highlights

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

• We maintain our FY20F–FY22F earnings following the analyst briefing today, which highlighted the following:

The special periodic survey (SPS) maintenance programme for Velesto’s Naga 3 rig, which was initially scheduled for 45 days, is likely to be extended from December last year until end-March 2020 due to additional repair works required for one of the unit’s legs. Additionally, the client, Petronas Carigali, may select up to 60 days of zero-rated charter, which is an option available under the contracts for Naga 2, 3, 5 and 6. Given the extended maintenance work on Naga 3, Petronas may need to reschedule its drilling programme for field development with other suppliers in the value chain. In the worst-case scenario, Naga 3 may only be able to commence operations by 1 June this year.

The Naga 7 rig, which underwent SPS in 4Q2019, completed its maintenance programme on 26 December last year and is currently working with Sarawak Shell. As such, we expect Velesto’s 1QFY20 rig utilisation to remain relatively flat QoQ at 86%.

Naga 4 rig will be completing its contract with Roc Oil by the end of next month, and is expected to undergo routine maintenance of 4 weeks before working for Mubadala in 2QFY20. Meanwhile, Naga 8, which is under contract with Carigali Hess, is also scheduled for an SPS in 3Q2020.

All in, management affirmed that our recently revised FY20F rig utilisation assumption of 85% vs. 80% in FY19 is achievable.

Management is non-committal about the distribution of dividends this year following the completion of its proposed RM2.2bil share capital reduction exercise by 3QFY20 given the company’s preference to conserve cash for early debt repayments and provide buffer in the event of any potential market downturn.

With regional daily rig rates reaching US$85K vs. Velesto’s 4QFY19 average of US$71K, the group remains optimistic in securing higher charter rates, especially for Naga 7 which is due for expiry in October 2020 and Naga 4 in 2Q2021.

• While Velesto’s FY21F PE of 23x may appear high, this is justified given the inflective earnings escalation following years of losses.

Source: AmInvest Research - 26 Feb 2020