• Overview. Velesto Energy (Velesto) swung to a net loss of RM26mn in 4Q22 mainly due to losses incurred in the integrated services segment which was affected by a one-off RM11.7mn costs for unanticipated changes to work programme as well as project delay due to bad weather. Besides that, the company also incurred a one-off tax expense of RM13.5mn due to under-provision in prior year. Notwithstanding that, revenue grew by 40% QoQ and 53% YoY to RM243mn due to higher rig utilisation as well as higher revenue from integrated services.

• Key highlights. Utilisation rate rose to 90% from 78% in 3Q22 which contributed to stronger full year utilisation rate of 62% in FY22 (FY21: 48%).

• Against estimates: Below. FY22 revenue of RM580mn exceeded our estimate at 107%. However, its bottom lime lagged our estimate due to one-off expenses for reactivation of hydraulic workover unit (HWU) as well as rising opex.

• Outlook. 5 rigs are currently in operation while NAGA 3 which recently returned from Vietnam is expected to commence work in Malaysia in March 2023. Given strong demand and limited supply, we are optimistic that the company can sustain an average utilisation rate of 75% moving forward. We also expect Velesto to garner higher DCR moving forward to compensate for its rising opex.

• Our call. Velesto stock price has gained by as much as 120% over the past 12-month. Hence, we downgrade Velesto to a HOLD (from BUY) with unchanged TP of RM0.30. Our TP implies 1x FY23F P/B. We advise investors to accumulate the stock on any stock price weakness.

Source: BIMB Securities Research - 28 Feb 2023