• Overview. Excluding unrealised forex gain worth RM7m, Velesto recorded core loss of RM7m in 3Q20 on lower asset utilisation rate. Revenue declined 37% yoy and 7% qoq to RM131m as utilisation rate declined to 60% (Chart 1). On qoq basis, core loss narrowed as the company incurred additional expenses worth RM11m in relation to Covid-19 pandemic during 2Q20.
• Key highlights. 9M20 revenue declined by 9% yoy to RM448m as average asset utilisation rate declined to 68% from 77% in 9M19.
• Against estimates: Inline. 9M20 EBITDA of RM223m made up 87% of our FY20F EBITDA. We deem this as within our forecast in anticipation of weaker 4Q20 on lower drilling activities.
• Outlook. Despite slight rebound in oil price, many oil and gas companies have not increased its capex and opex yet. Currently, only 4 out of Velesto’s 7 rigs are working (2Q20: 5 rigs) with three of them are expected to complete its contract in Dec 2020
• Earnings forecast. We made no change to our earnings forecast at this juncture, pending more clarity from management on potential new contracts for FY21F and beyond. We maintain our utilisation rate assumption for FY20F/FY21F at 60%/60% as we believe higher oil price could spur some interest for oil companies to restart drilling activities.
• Our call. Maintain HOLD on the stock with lower TP of RM0.14 (from RM0.16) as we roll over our valuation to FY21F. This implies 0.5x FY21F P/B. At current price, we think the market has largely reflected near term earnings risk.

Source: BIMB Securities Research - 27 Nov 2020