Secured long term contract from Petronas Carigali
Velesto announced that it has received a letter of award from Petronas Carigali (PCSB) for the provision of jack-up rigs for a duration of 2+1+1 years beginning 1Q22. We understand that this is an umbrella contract whereby the rig utilisation will be based on call-out basis. Meanwhile, the daily charter rate (DCR) will be based on prevailing market rate when the work order is issued with provision for slightly higher rate for higher-spec requirement such as offline capabilities and high pressure and high temperature (HPHT).
The first long term contract since pandemic
We are positive with this contract as it is the first long-term contract that it secured since the Covid-19 pandemic. Despite no definitive work schedule, we believe PCSB intends to secure rigs for its planned drilling program ahead. This could signify the potential rising demand for drilling rigs in near future amidst the elevated crude prices. Recall that Petronas expects demand for jack-up to peak in 2024 with 16 rigs as compared to 9 rigs in 2021. This makes a case for Velesto achieving full asset utilisation in 2023/2024.
No change to earnings forecast
We maintain our earnings forecast following the announcement. Our FY22F earnings is based on utilisation rate assumption of 70%. We believe this contract will help the company to meet our assumption. Based on its firm orderbook, we estimate that it has secured utilisation rate of c.40% in FY22 (FY21: 48%).
Maintain BUY with unchanged TP RM0.28
Maintain BUY on Velesto with unchanged TP of RM0.28 pegging 1x P/B to FY22F. We believe Velesto’s turnaround is around the corner premised on (i) rising demand for jack-up rig translating into recovery in utilisation rate and (ii) normalise Covid cost to improve its bottomline as the country enters into endemicity.
Source: BIMB Securities Research - 14 Mar 2022
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