Velesto’s 1HFY18 core loss of RM32.1m was deemed within our expectation of RM3m FY18 profit estimate but below consensus’ RM12m FY18 earnings forecast. 1HFY18 core loss narrowed by 79% on higher vessel utilisation of 62% (vs 1HFY17’s 47%), lower depreciation charge and finance cost. No changes to our estimates pending 2Q18 analyst briefing today. Maintain BUY recommendation with unchanged TP of RM0.34, based on 1.0x FY19 P/B multiple.

Deemed within expectations. 1HFY18 core loss came in at RM32.1m and we deem the result within our expectations of FY18 profit estimate of RM3.4m but below consensus’s RM12.3m estimates as we expect Velesto to register stronger earnings in 2HFY18 on the back of higher rig utilisation. No dividend was declared, as expected.

YoY: Core loss narrowed by 54% YoY to RM22.5m (from RM49.0m in 2QFY17) mainly due to lower depreciation charge (-27%) and lower finance cost (-44%) despite lower average utilisation rate of 59% (vs 68% in 2QFY17).

QoQ: Core loss widened by 1.3x QoQ from RM9.6m in 1QFY18 largely dragged by lower average utilisation rate of 59% (vs 65% in 1QFY18) masking lower finance cost (-9%).

YTD: 1HFY18 core loss narrowed by 79% from RM153.3m in 1HFY17 thanks to (i) higher vessel utilisation of 62% (vs 47% in 1HFY17), lower depreciation (-31%) and lower finance cost (-44%).

Uptick in rig demand. Currently, all seven rigs are contracted and thus we expect full year average utilisation to hit 75%. Worldwide rig demand for FY18-19 has improved to 349-380 as of June data (vs 338-378 as of April) with more than half of the demand coming from Middle East and India. However, this may still be insufficient to cater for all the 448 available jack-up rigs available globally (of which 27% of it remained idle as of June) coupled with the potential 90 rigs coming out from the yard in the next 3 years. Nonetheless, management is still confident that the supply demand dynamics will improve in the longer run as 40% 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.

Forecast. Unchanged pending 2QFY18 analyst briefing today.

Maintain BUY, TP: RM0.34. Maintain BUY recommendation with unchanged TP of RM0.34 based on 1.0x FY19 PBV multiple. We like Velsto 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 - 21 Aug 2018