• Overview. Velesto 1Q21 core net loss widened to RM60m mainly due to lower asset utilisation rate of 28% (1Q21: 84%; 4Q20: 50%) on the back of 2 operational rigs. Revenue declined 75% yoy and 56% qoq to RM44m while EBITDA also turned to loss of RM9.5m. However, this is partially offset by lower depreciation charges following asset impairment charges worth RM460m as well as one off accelerated depreciation expenses of RM22.7m in 4Q20.

• Against estimates: Inline. 1Q21 revenue of RM44m made up only 8% of our full year forecast. Notwithstanding, we deem this as within our forecast as we note that most of new contracts commenced in 2Q21.

• Outlook. We expect utilisation rate to gradually recover beginning 2Q21. Currently, 3 rigs are operating while another one is scheduled for mobilisation in the middle of June.

• Earnings forecast. We made no change to our earnings forecast and utilisation rate assumption of 70%/67% for FY21/FY22F. We think this is achievable despite slow start in 1Q21, which resembles asset performance in 2017.

• Our call. The stock price erased earlier gains in 1Q21 following accident involving sunken Naga 7. Nevertheless, we continue to believe that recovery in drilling activities will support higher rig utilization moving forward, leading to the turnaround in the company’s financial. Hence, we maintain our BUY call on the stock with unchanged TP of RM0.265. This implies 1x FY21F P/B.

Source: BIMB Securities Research - 1 Jun 2021