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.

• We have reversed our FY20F–FY21F earnings to losses and drastically lowered FY22F net profit by 93% on expectations of significantly lower rig utilisation assumptions even though Velesto’s 1HFY20 core net profit of RM12mil appears to be above our earlier FY20F net profit of RM4mil and street’s RM8mil.

• As cautioned back in May, 6 of Velesto’s 7 rigs may be out of charter by this year, which could translate to substantive losses for the group. In a worst-case scenario should Velesto fail to secure 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%.

• Currently, the Naga 3 rig, which has been under special periodic survey since the end of 2019, is currently idle without any firm charter. While Petronas Carigali has charter extension options for Naga 2, 5 and Naga 6, these rigs could remain or become unutilised in 3QFY20. At this stage, management is uncertain whether Petronas Carigali will exercise its rights given the sharp deceleration in global oil & gas activities.

• Given that Petronas has not exercised those options for Naga 2, 3 and 5, which are already idle currently, there is a strong likelihood that Velesto may need to renegotiate their contracts should these rigs be required in future.

• 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.

• Velesto’s 2QFY20 reversed to a loss of RM8mil (excluding forex loss) due to additional Covid-19 safety-related costs of RM11mil while rig utilisation dropped to 67% from 86% in 1QFY20. We understand that the group’s daily rig charter rate (DCR) was flat QoQ at US$71K.

• The group’s net gearing of 0.4x is manageable for now, with RM112mil term loans due for repayment over the next 12 months. While Velesto’s gross cash of RM190mil should be able to meet bank obligations this year, the group’s cash generation capability is less visible in FY21F if the rig market remains depressed.

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

Velesto Energy 26 Aug 202

Source: AmInvest Research - 26 Aug 2020