• Overview. 2Q19 core earnings turned to profit of RM12m on higher utilisation rate due to commencement of new contracts involving NAGA 2, NAGA 3, NAGA5 and NAGA 6 with Petronas Carigali (PCSB).

• Key highlights. 2Q19 utilisation rate rose to 74% (2Q18: 59%; 1Q19: 66%). This boosts 1H19 utilisation rate to 70% (1H18: 62%).

• Against estimates: Inline. The higher utilisation rate aided 1H19 core loss which narrowed to RM11m (1H18: -RM33m). The 1H19 EBITDA of RM124m (+38% yoy) made up 42% of our estimate vs 45% of consensus .

• Outlook. We expect stronger 2H19 amidst rising jack-up rig demand which should translate to higher DCRs. Recent local tenderbids ranged c.US$75-90k/day (against Velesto’s current DCR at US$70k/day). The company is looking to secure new contracts for NAGA 4, NAGA 7 and NAGA 8 which will expire in FY20. Meanwhile, the DCRs for 4 long term jack-ups with PCSB will be subject for review by 2Q20.

• Our call. Reiterate BUY on Velesto with higher TP of RM0.36 (from RM0.33), based on 1x FY20F P/B. While Velesto has managed to reduce its operating cost on improved charter terms, we think recent recovery in DCR could turn around its financial and boost sentiments towards the stock.

Source: BIMB Securities Research - 3 Sept 2019