3Q19 revenue of RM208.6m (+33% QoQ, +39% YoY) with core PATAMI of RM33.0m (vs. +177% QoQ, 3Q18: -RM8.9m) brought 9M19 straight back to black with a core PATAMI of RM22.4m (vs. core loss of -RM41.0m SPLY). We deem these results to be above ours and consensus expectations as they exceed FY19 forecast of RM19.3m/RM21.9m. We adjust our FY19/20/21 by 82%/35%/25% as we impute higher margin assumptions to reflect the improving operational leverage, as well as a higher utilisation rate assumption and higher DCR rates to reflect the recent award by HESS for the rest of the Naga’s in FY21 on the premise that the rig rates will converge once they are renewed. Maintain our BUY call and TP of RM0.46 based on 1.3x FY20 P/B multiple or +1SD above its 5 year mean P/B (from 0.9x FY19 P/B); we deem this justified as we are of the opinion that the jack up rig market is on the cusp of an upswing cycle.

Above expectations. 3Q19 revenue of RM208.6m (+33% QoQ, +39% YoY) with core PATAMI of RM33.0m (+177% QoQ; 3Q18: -RM8.9m) brought 9M19 straight back to black with a core PATAMI of RM22.4m (vs. core loss of -RM41.0m SPLY). We deem these results to be above ours and consensus expectations as they exceed FY19 forecast of RM19.3m/RM21.9m.

QoQ. Revenue improved by 33% QoQ to RM208.6m, this resulted in core PATAMI accelerating by 177% QoQ to RM33.0m (from RM11.9m in 2Q19) due to improved rig utilisation of 92% (vs. 74% in 2Q19 and 66% in 1Q19) and the resulting improvement in operational leverage. Consequently, EBITDA margins improved by 1ppts to 50% QoQ.

YoY. Revenue improved by 39% (from RM150.3m) on the back of stronger rig utilisation (+17 ppts YoY vs 75% in 3Q18) on improved day charter rates of USD70k vs. USD68k. A stronger USDMYR (3Q18: 4.1383 vs.3Q19: 4.1877) also boded well for Velesto. Subsequently, core losses of -RM8.9m turned to core PATAMI of RM33.0m YoY.

YTD. Group revenue improved by 28.0% from RM383.9m as a result of higher rig utilisation (77% vs. 67% YoY) and average charter rates (USD70k vs. USD68k). This subsequently resulted in earnings turning around from -RM41.0m to RM22.4m YoY.

Outlook. The recent NAGA 8 contract award (c. USD120-100k/day including mobilisation costs) essentially serves as the benchmark for rig rates to uprate when they come up for renewal (NAGA 4 & NAGA 7 will come up for renewal in 2020). We remain upbeat on the prospective renewed terms for rigs coming off contracts moving forward. We understand that there is a slight change in drilling schedule, as NAGA 3’s SPS has been brought forward earlier into 4Q19 (initial guidance was in 2Q20); this should result in a drop in utilisation rates to c.80%-90% in 4Q19. Despite this, Velesto remains on track to hit c.80% utilisation rate in FY19 (vs.73% FY18).

Forecast. We adjust our FY19/20/21 upward by 82%/35%/25% as we impute higher margin assumptions to reflect the improving operational leverage, as well as higher DCR rates to reflect the recent award by HESS for the rest of the Naga’s in FY21, on the premise that the rig rates will converge once they are renewed.

Maintain BUY, TP: RM0.46. Maintain our BUY call and TP of RM0.46 based on 1.3x FY20 P/B multiple or +1SD above its 5 year mean P/B (from 0.9x FY19 P/B); we deem this justified as we are of the opinion that the jack up rig market is on the cusp of an upswing cycle. Velesto remains an excellent proxy to recovering of oil prices and an uptick in upstream exploration and production activities.

Source: Hong Leong Investment Bank Research - 5 Dec 2019