• Overview. Velesto fell into core loss of RM15m in 2Q20 on lower asset utilisation rate. Revenue declined 10% yoy and 20% qoq to RM141m as utilisation rate declined to 67% (2Q19: 74%; 1Q20: 86%). EBITDA margin declined to 43% (2Q19: 48.9%, 1Q20: 54.5%) as the company incurred additional expenses worth RM11m in relation to Covid-19 pandemic.

• Key highlights. 1H20 average asset utilisation rate improved to 75% from 70% in 1H19.

• Against estimates: Below. 1H20 EBIT of RM37m made up 67% of our FY20F EBIT. We deem this as below forecast in anticipation of weaker 2H20 on lower drilling activities. Main deviation against our forecast stemmed from lower utilisation rate and higher depreciation charges and effective tax rate.

• Outlook. Capex and opex cut by oil companies has resulted in lower drilling activities. Currently, only 5 out of Velesto’s 7 rigs (implies max utilisation of 70%) are working with some contracts expiring in the next few months.

• Earnings revision. We cut our FY20F/FY21F/FY22F earnings forecast by 856%/70%/142% (Table 2) as we revise lower our utilisation rate and increase depreciation and tax expenses. We now estimate the company to record loss after tax of RM62m/RM76m/RM94m in FY20F/FY21F/FY22F.

• Our call. Maintain HOLD on the stock with lower TP of RM0.16 (from RM0.17) which implies 0.5x FY20F P/B. We think the company has low liquidity risk based on its low gearing ratio of 0.37x while the next bullet debt payment may only come due in 2022.

Source: BIMB Securities Research - 26 Aug 2020