Velesto 1Q19 core losses of RM22.5m was deemed within our/consensus profit estimates of RM23.3m and RM23.7m, respectively as we expect stronger QoQ results in the upcoming quarters in view of stronger utilisation ahead. No changes to our estimates as we still believe that Velesto is capable of a chieving >80% utilisation in FY19 (vs FY18’s 73%). While we reckon that Velesto is a good proxy to recovery of oil prices, we are keeping HOLD rating as YTD gain of 58% would have already priced on strong earnings recovery expectations. Maintain HOLD recommendation with unchanged TP of RM0.31 based on 0.9x FY19 P/B multiple.

Deemed within expectations. Velesto recorded core losses of RM22.5m in 1Q19. It was deemed within our/consensus profit estimates of RM23.3m and RM23.7m as we expect stronger QoQ results in the upcoming quarters in view of stronger utilisation. No dividend was declared, as expected.

QoQ: Velesto slipped into core losses of RM22.5m from core net profit of RM26.1m in 4Q18 due to weaker rig utilisation of 66% (vs 91% in 4Q18) and weaker EBITDA margin (38% vs 52% in 4Q18). We believe the margin deterioration is also a function of lower revenue to absorb fixed overheads.

YoY: Despite revenue improving marginally by 4% on the back of stronger rig utilisation of 66% (vs 65% in 1Q18), core losses widened by 1.9x from RM9.6m in 1Q18 no thanks to higher depreciation charge (+10%) and higher tax expenses (+38x).

Better utilisation ahead. Recall that Velesto has secured four drilling contracts worth USD105m for Naga 2, Naga 3, Naga 5 & Naga 6 with an average contract duration of 1-year earlier on. This will ensure consistent utilisation in the next 12 months and thus will result in lesser idle gaps between job intervals. In view of that, we still believe that Velesto is capable of achieving >80% utilisation in FY19 (vs FY18’s 73%).

Forecast. No changes to our estimates as we expect better quarterly results in the upcoming quarters with utilisation assumption of 82% in FY19. Meanwhile, FY21 earnings estimate of RM46.1m (+18% YoY) is introduced on the back of utilisation assumption of 83%.

Maintain HOLD, TP: RM0.31. Maintain HOLD recommendation with unchanged TP of RM0.31 based on 0.9x FY19 P/B multiple. While we reckon that Velesto is a good proxy to recovery of oil prices, we are keeping HOLD rating as YTD gain of 58% would have already priced in strong earnings recovery expectations.

Source: Hong Leong Investment Bank Research - 23 May 2019