Investment Highlights

• We maintain our SELL call on Velesto Energy with an unchanged fair value of RM0.09/share, based on its 5-year PBV through of 0.3x.

• We maintain our FY20F–FY22F earnings on expectations of lower rig utilisation in 2HFY20 even though Velesto’s 1QFY20 core net profit of RM20mil appeared to come in above expectations, accounting for 33% of our FY20F earnings and 42% of consensus.

• As 4 of Velesto’s 7 rigs could drop out of charter this year, we caution that the group could revert to losses again.

• Currently, the Naga 3 rig, which has been under special periodic survey since the end of 2019, will not be deployed in 1H20 under its contract with Petronas Carigali while Naga 2, 5 and Naga 6 will drop out of firm charters in 2QFY20.

• While Naga 2, 5 and 6 have 2 options for annual extensions, management is uncertain whether Petronas Carigali will exercise its rights given the sharp deceleration in global oil & gas activities.

• Additionally, Naga 7’s firm contract with Sarawak Shell will lapse on 4QFY20 with no extension options in hand while Naga 8 will undergo a special periodic survey in 4Q20-1Q21 before commencing work with Carigali Hess in 2Q21.

• In a worst case scenario should Velesto not secure any contract extensions or new charters due to the Covid-19 dampened demand, we estimate that the group’s rig utilisation could drop below 30% by 4QFY20, way below the group’s estimated breakeven level of 70%.

• Velesto’s 1QFY20 core net profit surged 2.5x QoQ on a 23% reduction in operational costs to RM75mil, even though revenue slid 1% to RM176mil.

• The group’s daily rig charter rate (DCR) was flat QoQ at US$71K while utilisation remained at 86%.

• However, on a YoY comparison, the group’s revenue rose 39% from a DCR increase of US$3K/day while utilisation soared 20ppt to 86%. This reversed Velesto’s bottom line from a 1QFY19 loss of RM23mil.

• The group’s net gearing of 0.4x is manageable for now, with RM113mil term loans due for repayment this year. However, Velesto’s gross cash of RM288mil should be able to meet bank obligations this year.

• While Velesto’s P/BV of 0.5x may appear low, this is justified given the losses and potential impairments from idled rig assets.

Source: AmInvest Research - 21 May 2020