• Velesto Energy narrowed its core losses to RM20.2m in 2Q18 (2Q17: RM49.5m) mainly due to lower opex as a result of cost optimization measures as well as lower depreciation charges.

• 2Q18 AUR came slightly weaker at 59% (2Q17: 68%; 1Q18: 65%) bringing 1H18 AUR to 62%. Overall, 1H18 EBITDA trailed our forecast at 36%. Notwithstanding, we expect higher AUR in 2H18 as the company may achieve full utilization in 4Q18

• We retain our BUY call on Velesto with an unchanged TP of RM0.33 premised on 1x FY19 P/B. We expect Velesto to benefit from the sector’s sustainable recovery.

Narrowing core losses despite lower utilisation rate

Velesto narrowed down its core losses to RM20.2m from RM49.5m in 2Q17 mainly on lower opex and depreciation charges. This is despite it recorded lower average asset utilisation rates (AUR) of 59% (2QFY17: 68%). We understood that Velesto had restructured its manpower salaries in order to improve its competitiveness. Overall, 1H18 EBITDA came at RM89.9m and made up 36% of our FY18 EBITDA forecast.

Weaker qoq as Velesto on transitioning period

On quarterly basis, its revenue dropped by 8% to RM112m while EBITDA dropped by 11% to RM42m mainly on lower AUR (1Q18: 65%). Velesto. We believe this was due to the assets coming to tail-end of contract before transitioning to newer jobs. To recap, both NAGA 3 and NAGA 7 ended its respective contract in Jun 18 while NAGA 4’s contract expired in Jul 18.

Focus remains on optimising asset utilisation rate

Despite recording lower AUR in the quarter, we remain optimistic with the company achieving AUR of 75% for FY18 (1H18: 62%) as the company had recently secure new contract to replenish the orderbook. Presently, all rigs are contracted with 5 already working. The company expects another 2 rigs to be mobilised by end of Aug 2018 and attain almost full utilisation rate in 4Q18. While focus remains on optimising AUR, we note that DCR is hardly recovering.

No change to our earnings forecast

While EBITDA trailed our forecast at 36%, we made no changes to our FY18F estimates as we expect some earnings respite in 2H18 with almost full utilisation in 4Q18.

Retain BUY with unchanged TP of RM0.33

We retain our BUY recommendation on the stock with unchanged TP of RM0.33, based on 1x FY19P/B. We reckon that Velesto will remain the preferred jack-up operator primarily due to its strong relationship with Petronas as well as its fairly modern fleet. We believe sustainable utilisation rate will lead to higher DCR in near to medium term, benefitting Velesto moving forward.

Source: BIMB Securities Research - 21 Aug 2018