Velesto’s 9MFY18 core loss came below our/consensus expectations due to higher than expected operating cost. This is despite 9MFY18 core loss narrowing by 72% on higher vessel utilisation of 67% (vs 9MFY17’s 61%), lower depreciation charge and finance cost. Following that, we widen our FY18 loss estimate to RM33.6m and slash FY19/20 earnings by 64%/44%. Downgrade to HOLD recommendation with lower TP of RM0.27, based on 0.8x FY19 P/B multiple.

Below expectations. 9MFY18 core loss of RM41.0m came below our expectations, at 4.0x of our FY18 losses estimate. It was also below market expectations of RM3.5m profit estimate. The negative deviation was mainly due to higher-than expected operating cost. No dividend was declared, as expected.

QoQ: Core loss narrowed by 60% QoQ to RM13.6m from RM22.5m in 2QFY18 largely helped by higher average utilisation rate of 75% (vs 59% in 2QFY18), masking higher finance cost (+7%).

YoY: Velesto slipped into core loss from RM5.5m profit in 3QFY17 mainly due to lower average utilisation rate of 75% (vs 90% in 3QFY17), offsetting lower depreciation charge (-24%) and lower finance cost (-42%).

YTD: 9MFY18 core loss narrowed by 72% (from RM147.8m) in 9MFY17 thanks to (i) higher vessel utilisation of 67% (vs 61% in 9MFY17), lower depreciation (-29%) and lower finance cost (-43%) masking negative impact from weaker USD against MYR.

Stronger 4QFY18. Currently, 6 rigs are contracted and Naga 2 has recently completed its contract. 2 more rigs are likely to off hire by end of this year. Therefore, we are expecting Velesto to register 90% utilisation in 4QFY18 and full year average of 73% in FY18. As for next year, management is still targeting to achieve 80% utilisation with resilient job enquiries from the clients.

Forecast. We widen our FY18 loss estimate to RM33.6m losses (from RM10.3m previously) after accounting for higher operating cost. At the same time, FY19/20 earnings are also cut by 64%/44% after lowering vessel utilisation and higher operating cost.

Downgrade to HOLD, TP: RM0.27. Following earnings disappointment, we downgrade Velesto to HOLD rating with lower TP of RM0.27 (from RM0.34 previously) based on lower FY19 PBV multiple of 0.8x (from 1.0x). We turn more cautious on Velsto’s outlook in view of volatile oil prices, which may slow down the recovery of the upstream segment. In the worst case scenario, whereby oil prices continue to retrace for more than 6 months, we reckon that the exploration drilling segment in which Velesto is operating in would be the first sub-segment to be affected given that it is largely dependent on oil majors’ capex spending.

Source: Hong Leong Investment Bank Research - 26 Nov 2018