• 4Q18 core profits more than doubled yoy to RM23m on the back of higher margins from lower depreciation charges and cost saving initiatives.

• Overall, 2018 EBITDA rose 6% to RM246m and was largely inline with our estimates at 98% while core PATAMI, though narrowed significantly, lagged our estimates.S

• 2018 rig utilization rate improved to 73% (2017: 70%). We expect jack-up demand to be more robust in 2019 on higher demand from Petronas to rejuvenate brownfield assets in Malaysia.

• Maintain BUY on Velesto with an unchanged RM0.33 TP which is premised on 1x 2019F P/B. We expect Velesto to continue to benefit from the sector’s sustained recovery.

Sustained structural recovery

4Q18 core profits more than double yoy to RM23m (4Q17: RM9m) mainly due to improving margin and lower depreciation charges. EBITDA margin improved by 160bps to 51% in the quarter amidst ongoing cost saving initiatives such as introduction of new salary structure for rig workers and charging mobilisation/demobilisation cost to charterers. The higher margin was achieved despite lower 4Q18 average asset utilisation rates (AUR) of 91% (4Q17: 95%). Overall, 2018 EBITDA grew 6% yoy to RM246m and was largely inline with our estimates at 98%.

More drilling but charter rate remain subdued

The demand for jack-up rig improved in 2018 as Velesto posted higher AUR of 73% in 2018 (2017: 70%). Nonetheless, revenue from drilling dipped slightly by 2% to RM556m (2017: RM570m) amidst lower average daily charter rate (DCR) of US$68k/day from US$70k/day.

Encouraging earnings outlook

We maintain our earnings outlook given the robust demand for jackup expected in 2019. This is in tandem with Petronas Activity Outlook 2019-2021 where the NOC’s 2019 jack-up rig demand is expected to rise to 16-18 rigs (2018: 10-12 rigs).

Retain BUY with unchanged TP of RM0.33

We retain our BUY call on Velesto with an unchanged TP of RM0.33 which is based on 1x 2019F P/B. We reckon Velesto would remain the preferred jack-up operator primarily due to its strong relationship with Petronas and its fairly modern fleet. We believe sustainable utilisation rate would translate to higher DCR over the near to medium term.

Source: BIMB Securities Research - 28 Feb 2019