• Overview. Velesto turned in a headline profit of RM16.3m in 2Q21 mainly due to recognition of insurance claim worth RM551m in relation to NAGA 7 incident. The rig was declared as total loss and the insurer has agreed to pay compensation for the damage. It was more than enough to offset the asset write-off charges worth RM460m. Excluding these items, core loss widened to RM75m (2Q20: core LAT RM8m) as revenue declined 41% yoy to RM83m due to lower asset utilisation rate of 38% (2Q20: 67%).
• Key highlights. There was small improvement on qoq basis though it was not as strong as we initially expected. Revenue rose by 90% as utilisation improved from 28% in 1Q21 (Chart 1). This was on the back of 3 operating rigs (NAGA 4, 5 and 8).
• Against estimates: Below. 1H21 revenue of RM128m made up only 22% of our full year forecast. This is below our expectation as recovery in asset utilisation was slower than expected. 1H21 utilisation rate was at 33% vis-à-vis our full year assumption of 70%.
• Earnings forecast. We made no change to our earnings forecast at this juncture pending analyst briefing tomorrow.
• Outlook. Drilling segment continued in recovery phase as more jobs being handed out to contractors, potentially indicating that the sector utilisation rate was bottoming out. Currently, Velesto still has 3 rigs working while 2 more rigs will commence its charter contract in Sep 2021. The remaining rig is still being tendered out to its clients.
• Our call. Despite slow recovery in drilling activities, we remain sanguine on the eventual recovery in the long term. Maintain our BUY call on the stock with unchanged TP of RM0.265 which implies 1x FY21F P/B.

Source: BIMB Securities Research - 26 Aug 2021