• We reiterate our BUY recommendation on Velesto as we remain sanguine on recovery in offshore projects. In Jul 2021, the sector utilization rate hit 70% which is near to pre-pandemic level as demand started picking up and more rigs were scrapped.
• We believe the loss of NAGA 7 will expedite Velesto’s turnaround as it will improve its cost structure and reduce utilisation rate break-even to c.65% from current c.75%, based on our estimate.
• We raise our FY22F/FY23F earnings forecast by >100%/76% respectively to account for the anticipated cost savings, but cut FY21F earnings to reflect 1HFY2021 under-performance.
• We raise our TP to RM0.28 (from RM0.265) pegging 1x P/B to FY22F. We believe its earnings turnaround will provide the key re-rating catalyst to the stock price.

Turnaround story remains well in place

We remain optimistic with Velesto’s turnaround story mainly driven by its better cost structure following the loss of NAGA 7. We estimate that it will generate c.RM45m in annual cost savings which will reduce its utilisation rate break-even to 65% from current 75%.

Jack-up demand is picking up

As oil prices rally, we see the sector utilization rate regaining momentum as more projects have been revived, pushing up demand. In Jul 2021, utilization rate rose to 70% which is close to pre-pandemic level.

Working to replenish its orderbook

Despite a weak performance in 1H2021, we expect Velesto to recover in 2H21 as most of its rigs have already secured short-term drilling contract for 2H21. As at end of 2Q21, its remaining firm orderbook stands at RM544m while tenderbook stands at RM1.9bn. We expect Velesto to secure more contracts soon mainly for local projects commencing 2Q2022, leveraging on more competitive rigs due to the upcoming installation of offline capabilities on its 2 rigs.

To achieve sustainable profits FY22F onwards

We anticipate Velesto to record sustainable profits over FY22-23F mainly due to its improved cost structure from the loss of NAGA 7, supported by recovery in offshore drilling projects. We raise our FY22F/FY23F earnings forecast by >100%/76% respectively but cut FY21F earnings to reflect its weak performance in 1HFY2021.

Reiterate BUY with higher TP RM0.28

We reiterate our BUY recommendation on Velesto with a higher TP of RM0.28 (from RM0.265) pegging 1x P/B to FY22F. Currently, the stock trades at an undemanding valuation of 0.6x FY22F P/B reflecting the market’s pessimistic view over the company’s outlook.

Source: BIMB Securities Research - 8 Sept 2021