Velesto’s 1QFY18 core loss of RM13.2m was above HLIB and in line with consensus estimates. Core loss narrowed to RM13.2m mainly due to higher average utilisation rate of 65% (vs 26% in 1Q17). We expect rig utilization rates to increase in the subsequent quarters. We changed our FY18 forecast to core net profit of RM3.4m from core loss and raised our FY19 forecast by 72.2% to reflect higher expected rig utilisation. We introduce our FY20 forecast of RM53.9m. Maintain BUY recommendation with lower TP of RM0.39, based on increased 1.0x P/B multiple pegged to FY18 BVPS.

Results above expectation. 1Q18 core loss came in at RM13.2m and we deem the result above HLIB and in-line with consensus expectations. The stronger than expected results (i.e. lower loss) were mainly due to higher than expected rig utilization rates. For FY18, we were projecting a core loss of RM55.0m while consensus was projecting a core loss of RM14.2m. Rig utilization rates of the company are expected to increase in the subsequent quarters and hence we deem the results in line.

YoY: Core loss narrowed to RM13.2m (from RM104.1m in 1QFY17) mainly due to higher average utilisation rate of 65% (vs 26% in 1Q17).

QoQ: Core loss of RM13.2m was posted against core profit in 4Q17 mainly due to lower average utilisation rate of 65% (vs 95% in 4Q17).

Petronas activity. According to Petronas Activity Outlook 2018-2020 report, about 7- 10 jack-up rigs are required by Petronas Group of Companies and other Petroleum Arrangement Contractors (PACs). This is positive for Velesto as being one of the only two local players in the industry, the company stands a fairly good chance to secure sufficient amount of contracts to replenish its order book.

Outlook. At present, five of the company’s jack-up drilling rigs are working with two more expected to be mobilized in the third quarter. Hence, we expect rig utilization rates of the company to increase in the subsequent quarters.

Forecast. We changed our FY18 forecast to core net profit of RM3.4m from core loss previously and raised our FY19 forecast by 72.2% to reflect higher expected rig utilisation rates. We introduce our FY20 forecast of RM53.9m.

Maintain BUY, TP: RM0.39. Maintain BUY recommendation with lower TP of RM0.39 (from RM0.44) post earnings forecast and balance sheet model adjustment. We raise our valuation parameter to 1.0x FY18 PBV multiple (from 0.8x) as we opine that the worst is over and the company is expected to be profitable going forward. Moreover, Velesto is a major beneficiary of steady jack-up rig demand by Petronas Group given its role as the largest domestic jack-up rig owner.

Source: Hong Leong Investment Bank Research - 25 May 2018