Velesto has secured two drilling contracts worth USD11m for Naga 3 and Naga 5. Overall, we are positive on the contract win as it improves the rig utilisation in 2H18 and is on track to management’s target of average 75-79% for FY18 (vs 1Q18’s 65%). The implied DCRs of USD65k-70k/day are also in line with current market rate. With no changes in our estimates, maintain BUY recommendation on the stock with unchanged TP of RM0.34 pegged to 1.0x FY19 PBV.

NEWSBREAK

Velesto Energy has received two Letter of Awards from Petronas Carigali for the provision of Jack-Up Drilling Rig services, the approval of which was received yesterday. The combined estimated contract value, excluding options is USD10.8m. Velesto has assigned Naga 3 & Naga 5 for these jobs. Contract for Naga 3 to drill two wells with an option of additional one plus one wells will commence between 15 Jul-15 Aug 2018 whilst the second contract for Naga 5 to drill two wells with an option of additional two wells will start within this month.

HLIB’s VIEW

Full year utilisation at 75%-79%. We are overall positive on the contract secured as it would improve Velesto’s rig utilisation in 2H18, which is on track to achieve management’s targeted rig utilisation of average 75-79% for FY18. Note that Velesto’s rig utilisation for 2Q18 is expected to be lower (vs 1Q18’s 65% and 2Q17’s 68%) due to slight delay of the new contracts (Naga 3 and Naga 6).

DCRs in line with current market rate. While the breakdown of each contract value is not disclosed, we reckon that the DCR for Naga 5 will be slightly higher than Naga 3 given its younger fleet age (4 year old vs Naga 3’s age 8) and its ability to operate in deeper water depth of 400 ft (vs Naga 3’s 350 ft). We understand that the DCR for these two contracts are hovering between USD65k-USD70k/day, in line with current market rate.

Forecast maintained as it is within our FY18 charter rate assumption of USD70k/day and average rig utilisation of 75%.

Maintain BUY, TP: RM0.34. Maintain BUY recommendation with unchanged TP of RM0.34 based on 1.0x FY19 PBV multiple. We like Velesto for being the largest domestic jack-up rig owner to benefit from the demand uptick in jack-up rig amid stabilisation of oil prices.

Source: Hong Leong Investment Bank Research - 10 Aug 2018