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 trough of 0.3x.

• Following an online analyst briefing today, we maintain our forecasts. These are the salient highlights of the meeting:

• The group incurred additional costs of RM11mil in 2QFY20 due to quarantine requirements, additional allowances for workers staying longer on rigs, extension of offshore days to 49 days from 28 days, 9 transit centres to check workers and special standby/meal allowances.

• Velesto believes that these Covid-19-caused expenses should decline as the movement control orders have become less stringent. Additionally, the group hopes to recover some of these quarantine costs from clients.

• The group’s remaining firm order book has decreased to RM0.6bil from RM0.7bil while optional extensions fell more significantly to RM0.3bil from RM0.9bil. This stems from Petronas not exercising these options for Naga 2, 5 and 6.

• However, tenders by clients for rig contracts are currently short-term in duration due to the uncertain oil price outlook. For the 27 tenders which the group is currently bidding, 23 is short term while only 4 is long term vs. 18 short term and 6 long term in May this year.

• Based on the group’s rig schedule, utilisation is likely to drop below 50% for 3QFY20 and 30% in 4QFY20, below the group’s breakeven of 70%.

• The group managed to register a slightly higher daily charter rates at US$72K in 2QFY20 vs. US$71K in 1QFY20 even while rig utilisation dropped to 67% in 2QFY20 from 84%. We believe this stems from some of the expiry of rig charters with lower day rates while fresh short-term charters for Naga 2 and Naga 4 have not commenced. We understand that the Mubadala charter rate for Naga 4 has been slightly negotiated at a lower level due to the current depressed outlook. Hence, we expect daily charter rates to start declining in 2HFY20.

• Management is currently comfortable with its net gearing at 0.4x currently as the group has made voluntary pre-payment of loans up to RM497mil over the past 2 years with gross cash of RM190mil in hand. Over the next 12 months, term loan repayment amounts to RM112mil.

• The group views any potential impairments as not substantial given that over RM2bil provisions have already been made for the rigs over the past 3 years.

• While Velesto’s P/BV of 0.4x may appear low, this is justified given the upcoming losses from idled rig assets.

Source: AmInvest Research - 26 Aug 2020