• We remain optimistic on Velesto Energy (Velesto) given a  tightening rig market. As of January 2023, marketed utilization  rate stood at 91% which is near the peak of previous cycle.

• Note that Petronas has approved a revised rate for Velesto’s jack-up rig effective March 2023. We believe this will offset against the  impact of rising opex and thus pushing the company back into  profitability beginning 1Q23.

• Following recent stock price weakness, we upgrade Velesto to a  BUY with unchanged TP of RM0.30 pegged at 1x P/B to FY23F.

Rig Market is Getting Tighter

Velesto remains optimistic with its business outlook amidst a tighter  rig market. As of January 2023, there were 393 contracted rigs versus  marketed supply of 431 rigs. This implies marketed utilisation rate  (i.e., sector utilisation rate) of 91% which is near the peak of the  previous cycle of 94% in 2013 (Chart 3). This is driven by limited supply  of rigs (which involved scrapping of old rigs) and rising demand.  According to management, newbuilding of rigs by competitor remains  muted at the moment. As such, we think market condition will not  ease significantly in the near future.

Revised DCR to be Effective in Mar 2023

Against this backdrop, daily charter rate (DCR) has continued to rise.  A recent fixture with a contract tenure of less than a year has been  fixed at USD131k/day which is 68% higher than the prevailing  Velesto’s DCR of USD78k/day. During the analyst briefing, we were  informed that Petronas has approved a revision to Velesto’s DCR  effective March 2023. While the company remains tight-lipped on the  revised DCR, it has guided that the rate was fixed against the market  rate when the negotiation began somewhere in early 2H22 (i.e., around USD80-120k/day).

Change to Earnings Forecast

Following the latest development, we raise our FY23-25F revenue  forecast by 8-12% as we impute a higher DCR assumption of USD90k100k/day. This should be sufficient to offset against the impact of  rising opex that was evident in FY22. However, we still pare down our  FY23-25F earnings by 5-7% (Table 1) as we adjust higher our interest  expense assumption. On the utilisation rate, we expect Velesto to  reach a 75% level in FY23F as it has firmed up work orders with clients.  The company is currently tendering for jobs in FY24-25.

Upgrade to a BUY with Unchanged TP RM0.30

Following uninspiring 4Q22 result, the stock price has plunged by 32%  and currently hovering c.RM0.19/share. Nonetheless, we think it is  attractive to accumulate the stock at current price level. Hence, we  upgrade Velesto to a BUY with unchanged TP of RM0.30 pegged at 1x  P/B to FY23F.

Source: BIMB Securities Research - 2 Mar 2023