Investment Highlights

• We maintain our HOLD call on Velesto Energy (formerly UMW Oil and Gas Corporation) with an unchanged fair value of RM0.24/share, based on a 25% discount to its book value of RM0.32/share. As a comparison, Malaysia Marine & Heavy Engineering, which has a net cash of RM0.40/share, is currently trading at half its book value.

• Following an analyst briefing with Velesto’s president Rohaizad Darus, we came away still unconvinced that the company’s earnings can rebound sufficiently to catalyse a re-rating. These are the salient takeaways from the meeting:

• “Veles” in the company’s new name “Velesto” means dragon in the Slovakian language, and is similar to the Malay word “Naga”, which will continue to be used for the branding of the group’s rigs.

• Velesto’s 1QFY18 net profit of RM5mil, would have been a loss of RM2mil-RM3mil, excluding realised forex gains of RM18mil from the timing difference of paying USD loans with rights proceeds partly offset by RM10mil provision for receivables.

• However, the group’s 2QFY18 rig utilisation is likely to be similar to 1QFY18’s 65%, which will potentially mean that the group will not be able to break even with daily charter rates still soft at US$68K.

• Naga 2 and 6 are currently warm stacked while the charters of Naga 3 and 7 will expire in June this year and Naga 4 by July this year. All-in, there will be 5 rigs that could be out of charter by 3QFY18 unless fresh charters materialise soon. The Naga 5 charter will likewise expire by September this year unless Repsol exercises its option to renew another year.

• With regional daily rig charter rates at US$55K-US$65K vs. US$68K-US$70K in Malaysia, management affirms that Petronas does not foresee any increase in 2018-2019.

• We understand that Naga 2, 3 and 6 may be close to securing short-term charters of around 4-5 months while Naga 5 could have a 6-month charter until early 2019 and Naga 4 a 1-year charter.

• Management is hopeful that 7 rigs could be working by July this year and restore Velesto to profitability in 3QFY18. However, we note that 3 of those short-term potential charters will expire by 4QFY18, which will translate to only 4 rigs in operation and resumption of losses for the group.

• The group is tendering for 23 short-term charters and 7 longterm charters which have a combined value of US$660mil vs. its current firm order book of US$359mil and optional extension worth US$426mil. However, the major portion of these tenders stems from overseas which have lower charter rates compared to Malaysia’s.

• We view the 13% share price discount to its book value as justified given that weak charter rates and short-term charters, comprising a significant portion of its tenders and order book, clouds Velesto’s earnings visibility.

Source: AmInvest Research - 28 May 2018