Velesto Energy (Velesto) 1H23 core profit of RM31.6mn was deemed in line with our estimate despite only making up 26% of our forecast and 35% of consensus’ estimate. On quarterly basis, core earnings rose 22% QoQ to RM17.4mn mainly due to higher daily charter rate (DCR) of USD94k/day (vs USD90k/day in 1Q23). It could be higher without the losses at non-rig services of RM3.6mn LBT and higher effective tax rate. Rig utilisation rate was excellent at 89% in 1H23 though it may dip slightly in 3Q23 before recovering in 4Q23. We expect the company to be able to fully capitalise on rising DCR given most rigs are currently on short-term charter. Maintain a BUY call on Velesto with TP RM0.30 which implies 15x FY24F P/E and 1x FY24F P/B.

• Within expectation. 1H23 core profit of RM31.6mn came at 26% of our forecast. We deem the result as within estimate in expectation of stronger earnings in 2H23 amidst rising DCR.

• QoQ. Revenue slipped 3% to RM279mn due to lower revenue from integrated segment (i.e. hydraulic workover unit (HWU) operation and non-rig services of Integrated Rig, Drilling and Completion (i-RDC) contract in particular from NAGA 5 contract with Hess). On the other hand, drilling revenue rose 16% to RM213mn driven by higher average DCR that rose by 4.4% to USD94k/day (1Q23: USD90k/day). 2 rigs were contracted at higher DCR of USD100k/day i.e. NAGA 3 and NAGA 6 that were under contract with PTTEP and Petronas Carigali respectively. This led the expansion in EBITDA margin by 230bps to 28.2% (1Q23: 25.9%). Similarly, core PATAMI grew 22% to RM17.4mn despite higher effective tax rate of 23.4% (1Q23: 8.2%).

• YTD. 1H23 revenue rose 245% YoY to RM566.6mn thanks to (i) higher rig utilisation rate of 89% (1H22: 40%), (ii) higher DCR of USD90k/day (1H22: USD75k/day), and (iii) higher revenue from non-rig services such as HWU operation and I-RDC contract. Core PATAMI improved markedly to RM31.6mn from core loss of RM89.4mn in 1H22.

• Outlook. Utilisation rate may taper down in 3Q23 before gaining momentum again in 4Q23. Both NAGA 2 and NAGA 8 was planned to have maintenance-related downtime whereas NAGA 4 conducted its special periodic survey (SPS) for 70 days in Singapore. NAGA 2 and NAGA 6 have recently started its contract with Petronas Carigali and Jadestone respectively, whereas NAGA 3 and NAGA 4 will resume working with Petronas in Sep 2023. As such, all rigs are expected to be working in for the full quarter in 4Q23. Hence, we believe Velesto is still on track to achieve a 75-80% utilisation rate for FY23.

• Our call. Maintain Velesto as a BUY with unchanged TP of RM0.30. Our TP implies 15x FY24F P/E and 1x FY24F P/B.

Source: BIMB Securities Research - 30 Aug 2023