• Velesto Energy (formerly known as UMW Oil & Gas) narrowed its core losses to RM13.3m in 1Q18 (1Q17: RM104.1m) as average asset utilization rate improved to 65% (1Q17: 26%).

• Overall, 1Q18 EBITDA of RM47.5m trailed our FY18 forecast at 19% but we expect some earnings respite in coming quarters.

• Utilization rate is set to improve with 2 rigs to be mobilise in 3Q18, leveraging on its local content competitive advantage.

• We upgrade Velesto to TRADING BUY with an unchanged TP of RM0.33 as we think recent weakness in share price offers buying opportunity on improving outlook amidst higher crude oil prices.

Still in core loss

Velesto posted a headline profit of RM4.9m in 1Q18 compared to a headline loss of RM104.1m in 1Q17 mainly due to improved average asset utilisation rates (AUR) of 65% (1QFY17: 26%) and forex gains of RM18.5m. Excluding non-core items such as forex gain of RM18.5m, it posted a core loss of RM13.3m. At operating profit level, 1Q18 EBITDA came at RM47.5m and made up 19% of our FY18 EBITDA forecast.

Asset’s utilisation rate remained healthy

On quarterly basis, the average AUR fell from 95% to 65% as NAGA2 and NAGA6 were warm-stacked in 1Q18. Management expects to deploy both rigs in 3Q18. This should bring full year AUR to our 70% assumption, reflecting the increasing demand for drilling requirement amidst higher crude oil prices.

No change to our earnings forecast

While EBITDA trailed our forecast at 19%, we made no changes to our FY18F estimates as we expect some earnings respite in subsequent quarters with the deployment of the 2 rigs in 3Q18.

Upgrade to TRADING BUY on improving outlook, TP: RM0.33

Recent weakness in Velesto share price offers buying opportunity in view of the improving market outlook. We think sustainable utilisation rate signals activities are picking up in view of more projects being viable as Brent hit US$80/bbl. Therefore, we think this could lead to higher DCR moving forward.

Source: BIMB Securities Research - 25 May 2018