KUALA LUMPUR (Dec 2): Despite reporting a significant year-on-year (y-o-y) jump in earnings, analysts have cut their earnings forecasts for Velesto Energy Bhd (KL:VELESTO), citing a challenging outlook for the company's rigs in the coming year.

Following its third-quarter results announcement last Friday, Velesto shares have been trading near two-year lows. At 11.57am on Monday, the shares were unchanged at 16 sen, their lowest since November 2023.

The counter emerged as the second-most actively traded on Bursa Malaysia, with over 35.98 million shares changed hands so far.

Hong Leong Investment Bank Research downgraded Velesto to a 'hold' call, from a 'buy' previously, cutting its target price (TP) to 17 sen from 35 sen.

The downgrade followed a downward revision of its FY2025 and FY2026 earnings forecasts, driven by "lower daily charter rate (DCR) assumptions for imminent job wins in 2025, and reduced utilisation assumptions for Naga 3, 5 and 8, based on the renewed rig schedule", the house said in a note on Monday.

The investment bank has cut its earnings forecast for the rig operator by 31% to 1.74 sen per share for the financial year ending Dec 31, 2025 (FY2025), and by 16% to 2.04 sen per share for FY2026.

Velesto’s earnings "will likely peak in FY2024", with core earnings per share at 2.3 sen, the report showed.

Last Friday, it was announced that Velesto's Naga 8 rig had completed its drilling programme for Carigali-Hess Operating Company Sdn Bhd earlier than scheduled.

It is understood that Velesto is currently bidding for a new job for the rig, with potential work expected to begin in 3QFY2025, but until then, the rig will experience downtime.

Maybank Investment Bank, while maintaining its 'buy' rating, revised its TP down to 25 sen from 32 sen. "We cut [our] FY2025-FY2026 earnings [forecasts] by 33%/35%, accounting for lower utilisation rate assumptions to match the group’s latest rig schedule guidance," the firm said.

Despite the weaker outlook, Maybank believes that "most of the negatives have been priced in".

Kenanga Investment Bank also reduced its TP by 30% to 21 sen, citing "weaker rig utilisation" and the early suspension of Naga 8. "We raise [our] FY2024 earnings [forecast] by 25% after assuming higher rig utilisation (84% to 87%), with DCR assumptions unchanged at US$121,333 (RM541,813)/day."

"On the other hand, we cut [our] FY2025 earnings [forecast] by 14% after reducing rig utilisation assumption to 78% (from 84%) due to higher possible rig idle time (Naga 3,5 and 8), as it looks to secure new drilling jobs for the rigs in 2025," the house added, maintaining its 'outperform' rating for the stock.

"On top of Naga 8, the group also needs to look for drilling jobs for Naga 3 and Naga 5," the firm said, emphasising the risk that a lack of new contracts could lead to further financial strain.

Velesto’s results for the third quarter ended Sept 30, 2024 (3QFY2024) showed a significant y-o-y improvement, with a core net profit of RM44.0 million, a 35-fold increase from the previous year.

The company benefited from a higher average DCR of US$127,000, compared with US$97,000 in 3QFY2023, and improved rig utilisation, which rose to 73% from 62% in the same quarter last year.

However, there was a 30% sequential drop in profit from 2QFY2024, which analysts attributed to a decline in utilisation — down to 73% from 98% — as two rigs, Naga 2 and Naga 6, underwent special periodical surveys.

Notably, the company’s order book remained strong, with RM876 million in firm contracts from major clients such as Petronas Carigali and ExxonMobil.

However, as analysts pointed out, securing additional contracts will be critical to offsetting the expected decline in utilisation and maintaining profitability.

TA Securities, which reduced its TP to 17 sen, from 30 sen previously, lowered its earnings estimates by 41% for FY2025 and 58% for FY2026, after revising "down utilisation rates by two to five percentage points and DCRs by 4% to 9%".

However, Velesto's plan to accelerate its maintenance programme will see all rigs free from heavy maintenance works until 2027.

"This readiness enables Velesto to capture potential opportunities should the market rebound," it said.