Velesto has secured four drilling contracts worth USD105m for Naga 2, Naga 3, Naga 5 & Naga 6. Overall, we are positive on the contract win as it improves the rig utilisation in 2H19 and is on track to management’s target of >80% for FY19 (vs FY18’s 73%). The average DCR of USD71.7/day is also 4% higher than average DCR of USD69k/day achieved in FY18 as well as our FY19 DCR assumption of USD70k/day. Therefore, we increased our FY19-20 earnings forecast by 90%-15% (amid a low base) respectively after imputing higher DCRs and utilisations. All in, maintain HOLD recommendation on the stock with higher TP of RM0.31 (from RM0.25) pegged to 0.9x FY19 PBV.

NEWSBREAK

Velesto Energy has received four 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 is USD104.7m. Velesto has assigned Naga 2, Naga 3, Naga 5 & Naga 6 for these jobs. All the contracts have duration of one year with an option to extend for another year. Naga 2, Naga 3 and Naga 5 will start working in Apr/May-19 while Naga 6 will commence operation in Jun/Jul-19 (see Figure #1).

HLIB’s VIEW

Better utilisation in FY19. We are overall positive on the contracts secured as it would improve Velesto’s rig utilisation in 2H19, which is on track to achieve management’s targeted rig utilisation of >80% for FY19 (vs FY18’s 73%). The 1-year contract duration for these jobs will ensure consistent utilisation in the next 12 months and thus will result in lesser idle gaps between job intervals.

Improving DCRs. Based on the contract value given, the implied DCRs ranges from USD69.7k-USD75.7k/day. The average DCR of USD71.7k/day is also 4% higher than average DCR of USD69k/day achieved in FY18 as well as our FY19 DCR assumption of USD70k/day. This shows that the DCR is recovering gradually despite regional players which are fetching DCR of USD55k-69k/day.

Forecast. We reckon that these four contracts will provide better earnings visibility in the next 12 months. Therefore, we increased our FY19-20 earnings forecast by 90%- 15% (amid a low base) to RM23.3m and RM39.1m respectively after imputing higher utilisation of 82%-83% (from 79%-82%) in FY19-20 and higher FY19-20 DCR assumptions of USD71k-USD72k/day (from USD70k-USD71k/day).

Maintain HOLD, TP: RM0.31. Post earnings adjustment, we maintain HOLD recommendation on the stock with higher TP of RM0.31 based on higher 0.9x FY19 (from 0.75x) PBV multiple. This is mainly premised on longer average contract duration and improving DCRs amidst better higher upstream activities. While we reckon that Velesto is a good proxy to recovery of oil prices, we are keeping HOLD rating as YTD gain of 69% would have already priced on strong earnings recovery expectations.

Source: Hong Leong Investment Bank Research - 23 Apr 2019