• Overview. Earnings recovery gained momentum in 3Q19 as revenue grew by 33% qoq to RM209m on the back of higher rig utilisation rate. 3Q19 core earnings more than double to RM33m in tandem with higher revenue.

• Key highlights. 3Q19 utilisation rate rose to 92% (3Q18: 75%; 2Q19: 74%) (Chart 1). This boosted 9M19 utilisation rate to 77% (9M19: 67%). As such, we believe Velesto is on track to achieve our full year FY19F utilisation rate target of 80%.

• Against estimates: Inline. The higher utilisation rate aided 9M19 to turn around to core profit of RM22.5m (1H18: -RM41.7m). The 9M19 EBITDA of RM230.8m (+55% yoy) was within ours and consensus’ forecast at 78% and 80% respectively.

• Outlook. We expect Velesto’s earnings will continue to grow in coming years benefitting from rising jack-up rig demand which should translate to higher DCRs. Recent regional fixtures saw DCR ranged c.US$75-100k/day (see Table 2) (against Velesto’s current effective DCR at US$70k/day). The company is looking to secure new contracts for NAGA 4 and NAGA 7 which will expire in FY20 (Table 1). Meanwhile, the DCRs for 4 long term jack-ups with PCSB will be subject for review by 2Q20.

• Our call. Maintain BUY on Velesto with unchanged TP of RM0.43 which implies 1.2x FY20F P/B. We believe this is fair in view of sustained recovery in jack-up rig market as well as its dominance as the largest local rig operator.

Source: BIMB Securities Research - 29 Nov 2019