• Velesto’s average DCR is expected to continue its upward trend, to reach a tipping point in 3Q24. As such, we expect the company to post a ‘sequentially stronger quarter ahead’.

• On that score, Velesto is expected to sustain its earnings well into FY25. The rig suspension by Saudi Aramco may release some supply into the market, however sector utilization rate is expected to stand at a healthy level of close to 90%.

• The company is ready to embark on merger and acquisition (M&A) as an avenue for its next phase of growth, leveraging on its healthy balance sheet.

• Maintain our BUY call on Velesto with TP RM0.34 based on 1.1x P/B that is pegged to FY24F BVPS of RM0.32. We think the current share price has not fully reflect its earnings growth from rising DCR.

A Decent Start in 1Q24

Velesto posted a decent 1Q24 core earnings of RM46.8mn mainly driven by rising average daily charter rate (DCR). The DCR rose 8% QoQ to USD107k/day on the back of the new rate approved by Petronas for NAGA 2, NAGA 3, NAGA 4 and NAGA 6 jack-up rigs effective February 2024. Meanwhile, the revised dayrate for NAGA 8 that is working for Carigali Hess has commenced in April 2024. Overall, this should propel the average DCR to rise further in the coming quarters with peak DCR possibly achieved in 3Q24. To recap, we have imputed an average DCR assumption of USD125k/day in our FY24F earnings estimate.

Sector Utilisation Rate is at Peak Cycle

Rig market conditions are still very tight with marketed utilisation rate (i.e., sector utilisation rate or SUR) has maintained above 90% since at least 4Q23. In April 2024, the SUR was at 94%. This was despite the increase in the number of marketed supplies that rose to 438 rigs (October 2023: 421 rigs) while the number of contracted rigs is 410 rigs (October 2023: 392 rigs). While the rig suspension made by Saudi Aramco would release some supply into the market, the SUR is expected to remain very healthy at 88% by end 2025, according to an estimate.

Looking for the Next Growth Engine

As the sector has reached a peak cycle, management anticipates that there is limited upside to DCR in future. Hence, the management is proactively looking for an M&A opportunity to enhance its long-term prospect.

Maintain BUY on Velesto with TP of RM0.34 Maintain Velesto as a BUY with TP of RM0.34 as we peg 1.1x P/B to FY24F BVPS of RM0.32. This implies 16x FY24F P/E. We believe the market will re-rate on the stock amidst stronger earnings visibility from the shortage of offshore rigs.

Source: BIMB Securities Research - 17 Jul 2024