We attended Velesto’s analyst briefing and walked away feeling positive. We understand that utilisation rates in 2Q18 will somewhat be similar to current level and utilisation rates are expected to increase in 2H18 with two rigs expected to be mobilized from 3Q18 onwards. Velesto’s orderbook currently stands at c. RM785m (inclusive of optional contract value), represents c.1.3x cover ratio to FY17 revenue. At this juncture, the group is participating in 30 rig contract worth a total of US$660m. The group managed to achieve RM5.5m cost savings YTD and we understand that FY18 cost savings to at least match the level in FY17 (RM9.6m) mainly from renegotiation on drillers salaries and bulk purchase discount. Maintain forecast. Maintain BUY recommendation with unchanged TP of RM0.39, based on 1.0x P/B multiple pegged to FY18 BVPS.

We attended Velesto’s analyst briefing and walked away feeling positive. Key highlights as below:

Utilisation rates. Rig utilisation rates have improved from 26% in 1Q17 to 65% in 1Q18 on the back of stabilization of crude oil prices due to OPEC production cut. We understand that utilisation rates in 2Q18 are somewhat similar to the current level. Rig utilisation rates are expected to increase in 2H18 with two rigs expected to be mobilized from 3Q18 onwards.

Charter rates. Daily charter rates (DCR) in Malaysia remains at c.70k and are not expected to improve significantly in the near term due to oversupply of rigs globally. However DCR prospect remain rosy in long term as more than 50% of the global rig fleet are aged more than 30 years, indicating that significant number of rigs could be scrapped in the longer run and provide significant boast to the DCR.

Rig demand. Worldwide rig demand is expected to increase from 338 in FY18 to 378 in FY19 with more than half of the incremental demand coming from Middle East and India. As a result, the group is actively looking to expand in this geographical area given the buoyant demand and to diversify its revenue stream.

Orderbook. Velesto’s orderbook currently stands at c. RM785m (inclusive of optional contract value), represents c.1.3x cover ratio to FY17 revenue. At this juncture, the group is participating in 30 rig contract worth a total of US$660m, indicating potential winning of more rig contracts by the group.

Cost savings. The group managed to achieve RM5.5m cost savings YTD and we understand that FY18 cost savings to at least match the level in FY17 (RM9.6m) mainly from renegotiation on drillers’ salaries and bulk purchase discount.

Maintain BUY, TP: RM0.39. Maintain BUY recommendation with unchanged TP of RM0.39 based on 1.0x FY18 PBV multiple 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 - 28 May 2018