RM178.1m (-15% QoQ, 6% YoY) with core PATAMI of RM8.0m (vs. 3Q19 -76%; 4Q18: -69%) brought FY19 back to black with a core PATAMI of RM30.4m (vs. core loss of -RM14.9m SPLY). The results came in below ours and consensus expectations due to a decline in utilisation rate in 4Q from a change in drilling schedules. Thus, we maintain our earnings as the turnaround schedule remains compelling with 4 rigs to come up for renewal in FY20. 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 a multi-year upswing cycle.

Below. 4Q19 revenue of RM178.1m (-15% QoQ, 6% YoY) with core PATAMI of RM8.0m (vs. 3Q19 -76%; 4Q18: -69%) brought FY19 back to black with a core PATAMI of RM30.4m (vs. core loss of -RM14.9m SPLY). We deem these results to be below ours and consensus expectations as it accounts for FY19 forecast of 87%/71% respectively. The deviation in namely from a lower utilisation rate due to a slight change in drilling schedule during the 4Q.

QoQ. Revenue declined by 15% QoQ from RM208.6m, this resulted in Velesto’s core PATAMI decelerating by -76% QoQ to RM8.0m (from RM33.0m in 3Q19) due to lower rig utilisation of 86% (vs. 92% QoQ and 74% in 2Q19) and the resulting decline in operational leverage. Consequently, EBITDA margins declined by 4.7ppts (from 51.2% in 3Q19).

YoY. Revenue declined by 6% (from RM189.3m) on the back of lower rig utilisation of 86% (vs 91% in 4Q18) despite the improved day charter rates of USD70k (vs. USD68k). Effective tax rates increased by 15ppts to 30% partially offset by lower finance costs by 19% YoY. Despite this, core profits declined to RM8.0m vs. RM26.1m YoY.

YTD. Group revenue improved by 17% from RM573.2m as a result of higher rig utilisation (80% vs. 73% YoY) and average charter rates (USD70k vs. USD68k). This subsequently resulted in earnings turning around from -RM14.9m to RM30.4m YoY.

Outlook. In FY20 we remain upbeat on the prospective renewed terms for rigs coming off contracts moving forward (N2, N3, N5, N6 will come up for renewal mid CY20). Furthermore, Velesto remains on track to hit >80% utilisation rates in FY20 (vs. 80% FY19) as most SPS activity has been undertaken in FY19. A stronger USD (vs MYR) also bodes well for Velesto in FY20.

Forecast. Despite the results shortfall, we keep earnings unchanged as FY20-21 will have improved drilling schedules due to significantly less incidences of SPS activity, this should see a significant uptick in utilisation rates.

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.

Source: Hong Leong Investment Bank Research - 26 Feb 2020