• Overview. Velesto 4Q20 net loss widened to RM493m mainly due to asset impairment charge worth RM460m. Excluding this item, core loss was recorded at RM33m due to lower asset utilisation rate as well as accelerated depreciation charge of RM22.7m. Revenue declined 44% yoy and 24% qoq to RM99m as utilisation rate declined to 50% (Chart 1).

• Key highlights. FY20 revenue declined by 18% yoy to RM547m as full year average asset utilisation rate declined to 66% (FY19:80%). This is better than our assumption of 60%.

• Against estimates: Above. FY20 EBITDA of RM283m came in above our forecast at 110%.

• Outlook. 1Q21 utilisation rate may decline further to 20% as there are only 2 jack-up rigs currently operating. Nonetheless, we expect utilisation rate to gradually recover beginning 2Q21 following recent contract wins for NAGA 2 and NAGA 5 as well as commencement of NAGA 8 contract with Carigali Hess in 2Q21.

• Earnings forecast. We reduced our FY21-22F net loss forecast to RM6-8m (Table 4) as we reduce our depreciation charges following kitchen-sinking exercise in current quarter. This is based on unchanged utilisation rate assumption of 70%/67% for FY21/FY22F.

• Our call. Maintain BUY on Velesto with unchanged TP of RM0.265. This implies 1x FY21F P/B. We remain optimistic on the recovery in drilling activities which should boost the stock price higher.

Source: BIMB Securities Research - 25 Mar 2021