• Local media reported that Velesto Energy (Velesto) has completed the upgrading works for NAGA 5 and NAGA 6 with offline capabilities. This upgrade will improve its operating efficiency by reducing drilling time per well.

• Following this, we expect Velesto to regain its market share from foreign operators and improve its utilization rate. No change is made to our forecast as our assumption remain intact.

• Continuous decline in share price is not justified given its stronger outlook. Reiterate our BUY call on Velesto with unchanged TP of RM0.28 pegged at 1x P/B to FY22F.

Completed Upgrading Works for NAGA 5 and NAGA 6

Local media reported that Velesto has completed the upgrading works for its Naga 5 and Naga 6 rigs with the offline capabilities. With this module, the rigs will be capable to undertake multiple scope of activities while drilling, hence reducing the drilling time per well. This, in return, will reduce the overall drilling project costs for clients and indirectly reduce its carbon emission footprint.

Improving Rigs Competitiveness

We note that Velesto’s market share for local drilling jobs has declined to a 5-year low in FY21 or at 35% from the average of 60% despite steady demand (Chart 2). This could be due to longer drilling days to complete a drilling campaign as compared to foreign rigs. In a situation where Velesto submit its bid at similar daily charter rate (DCR) against its peers, longer drilling period will result in higher costs for clients. As such, we believe this upgrade will improve its competitiveness, hence helping the company to regain its market share and improve its asset utilisation rate. This is further supported by (i) recent 2+1+1 year umbrella contract that it secured from Petronas Carigali and (ii) strong demand outlook for jack-up rig that is expected to peak at 16 rigs in FY24. We understand that the company is also looking to upgrade NAGA 3 and NAGA 4 with a similar feature in the near future.

No Change to Earnings Forecast

Our utilisation rate assumption remain intact following this development, hence no change to our earnings forecast. To recap, our FY22-24F earnings forecast is based on utilisation rate assumption of 70-75%.

Maintain BUY with Unchanged TP RM0.28

The stock price has further declined to an all-time low of RM0.075 possibly due to concern on its weak utilisation rate. However, we think the market could be too pessimistic on the company’s near term outlook while the potential of Velesto regaining its market share could have been overlooked. As such, we maintain Velesto as a BUY with unchanged TP of RM0.28 pegged at 1x P/B to FY22F.

Source: BIMB Securities Research - 11 Aug 2022