• Overview. Velesto posted its first profitable year since 2015 with a core profit of RM32.7m. Its 4Q19 core earnings, however, declined by 69% qoq and 56% yoy to RM10.2m as utilisation rate dropped to 86% (4Q18: 91%, 3Q19: 92%) as NAGA 3 underwent its mandatory SPS inspection.
• Key highlights. Velesto recorded full-year asset utilisation rate of 80% in FY19 which is inline with our assumption.
• Against estimates: Below. FY19 core profit of RM33m lagged both our and consensus’ forecast at 68% and 74% respectively. The main deviation against our forecast was higher-than-expected depreciation charges.
• 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. With all seven jack-up drilling rigs currently contracted, we are optimistic that the company can achieve higher utilisation rate of 85% in FY20.
• Earnings revision. We cut our FY20F/21F/22F earnings forecast by 40%/29%/21% to account for higher depreciation charges (Table 3).
• Our call. Maintain BUY on Velesto with lower TP of RM0.42 (from 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 - 26 Feb 2020