Post 4Q18 results briefing, we concur with management’s long term positive view on Velesto premised on (i) recovering rig demand to sustain rig utilisation, (ii) improving operating cash flow underpinned by higher cost efficiency and (iii) healthier financial position. However, 1Q19 utilisation is likely to be QoQ weaker and DCRs would only improve marginally in the near term in view of its premium rates in the region. With no changes in our earnings estimates, we keep HOLD recommendation with unchanged TP of RM0.25, based on 0.75x FY19 P/B multiple.

Utilisation rates. Naga 6 is currently undergoing special periodical survey (SPS), a maintenance check up every 5 years which usually takes 1-2months. Another two rigs, Naga 2 and Naga 5 will be sent for SPS in March. Therefore, we are expecting Velesto to register weaker utilisation in 1Q19 as only four rigs are working this quarter amidst monsoon season. That said, management is targeting to achieve >80% utilisation, higher than FY18’s 73% with resilient job enquiries from the clients coupled with lesser idle gaps between job intervals.

Charter rates. Velesto has achieved average daily charter rates (DCR) of USD69k/day in FY18, a notch higher than USD68k/day in FY17. Management is still in discussion with clients for better rates and would not want to enter too many long term contracts at current rates. That said, we only expect rates to improve marginally given that local drillers in Malaysia are still receiving higher rates than regional players which are fetching DCR of USD55k-69k/day.

Rig demand. Worldwide rig demand for FY19-20 remains robust at 351-390 as of Feb-19 with almost half of the demand coming from Middle East and India. However, this may still be insufficient to cater for all the 453 available jack-up rigs available globally (of which 29% of it remained idle as of Jan-19) coupled with the potential 74 rigs coming out from the yard in the next 4 years. The actual number of delivery would be lower than projection depending on the ability of clients to secure financing or pay huge lump sum amount. Nonetheless, management is still confident that the supply demand dynamics will improve in the longer run as 38% of the global rig fleet are aged more than 30 years, indicating that significant number of rigs could be scrapped in the longer run.

Cost savings and debt repayment. The group managed to achieve RM33m cost savings in FY18. While bulk of the low hanging fruits have been reaped, management indicated that current year cost savings could be rather minimal at <RM5m. Meanwhile, Velesto has repaid RM397.4m in FY18 and another 50m debt in Feb-19 on the back of improving operating cash flow. However, management indicated that the company may slow down its debt repayment schedule this year to conserve cash for other purposes.

Forecast. No changes to our estimates as we opt to be more conservative in our utilisation assumption at 75% (vs management target of >80%) in FY19.

Maintain HOLD, TP: RM0.25. Maintain HOLD recommendation with unchanged TP of RM0.25 based on 0.75x FY19 P/B multiple. Although exploratory drilling is expected to pick up this year, we believe Velesto’s upside could be capped by the idle time between jobs.

Source: Hong Leong Investment Bank Research - 1 Mar 2019