• 1Q19 core loss widened to RM23m on higher depreciation charges and lower finance income.

• Asset utilisation rate was slightly higher at 66% (1Q18: 65%). Overall, 1QFY19 EBITDA were flat at RM47m and trailed our estimates at 16%.

• We made no changes to our FY19F forecast as we expect earnings respite in coming quarters in view of recent long term 1+1+1 year contract secured for 4 rigs beginning Apr/May 2019.

• Upgrade the stock to TRADING BUY (from HOLD) with an unchanged TP of RM0.33 premised on 1x FY19 P/B. We think recent weakness in Velesto stock price offers trading opportunity amidst improving market outlook.

A slow start

1Q19 core loss widened to RM23m (1Q18: RM13m) mainly due to higher depreciation charges and lower finance income. Revenue grew by 4% to RM127m (1Q18: RM121.8m) as average asset utilisation rates (AUR) inched up 1ppt to 66% (1Q18: 65%) while EBITDA was flat at RM47m. Overall, 1Q19 EBITDA trailed our 2019F EBITDA forecast at 16%.

Weaker QoQ performance

On quarterly basis, Velesto turned to core loss from a core profit of RM23m in 4Q18 as average AUR fell to 66% (4Q18: 91%). This was due to 4 rigs (i.e. NAGA2, NAGA3, NAGA5 and NAGA6) were out of charter in 1Q19.

No change to our earnings forecast

Velesto had recently secured a long term 1+1+1 year contract for 4 idle rigs with Petronas Carigali for a combined firm contract value worth US$104m beginning Apr/May 2019. While EBITDA trailed our forecast at 16%, we made no changes to our 2019F estimates as we expect some earnings respite in coming quarters.

Upgrade to TRADING BUY with unchanged TP of RM0.33

We upgrade the stock to TRADING BUY (from HOLD) with unchanged TP of RM0.33, based on 1x FY19F P/B. Recent weakness in Velesto share price offers trading opportunity into the stock amidst improving market outlook, in our view. As contract tenures for recent charter awards are getting longer, we think this could imply lesser supply in the market leading to higher DCR moving forward.

Source: BIMB Securities Research - 23 May 2019