2Q core loss of -RM8.3m (QoQ: RM20.4m, YoY: RM11.9m) and 1H20 core profit of RM12.1m (YoY: -RM10.6m) was within our expectations (FY20f: -RM11.6m) but below consensus’ (FY20f: RM8.4m) as we expect a significantly weaker 2H20 due to lower utilisation rates for its rigs as only 2/3 out of its 7 jack up rigs will be chartered in 3Q/4Q. No changes to our estimates as we believe that Petronas would continue to be prudent with regards to its spending on exploration activities. Rig utilisation stood at 67% in 2Q20 (1Q20: 84%) and 75% in 1H20 and we expect Velesto to achieve a rig utilisation of c.55% for FY20. DCR was flat YoY and QoQ. Core loss was derived from our adjustments on forex losses amounting to RM6.9m. Maintain SELL at TP of RM0.12 based on 0.35x FY20 BVPS, which is -1.2SD below its 5 year historical mean P/B.

Within expectations. 2Q20 core loss of -RM8.3m (QoQ: RM20.4m, YoY: RM11.9m) brought 1H20 core profit to RM12.1m (YoY: -RM10.6m). We deem this results to be within our expectations (FY20f: -RM11.6m) but below consensus’ (FY20f: RM8.4m) as we expect 2H20 to be significantly weaker due to lower rig utilisation rates. Core loss was derived from our adjustments on forex losses amounting to RM6.9m. No dividends was declared, none expected for the year.

QoQ. Velesto recorded a core loss of -RM8.3m (QoQ: RM20.4m) in 2Q20 due to lower utilisation rates. Utilisation rates for 2Q20 stood at 67% (1Q20: 84%), 17ppt lower, while DCR was flat QoQ at about USD70k. Consequently, EBITDA margin stood at 45% (1Q20: 54%).

YoY. Revenue declined by 10% YoY as a result of lower utilisation rates (2Q19: 74%) while DCR has remained flat YoY. Consequently, core losses stood at -RM8.3m (YoY: RM11.9m).

YTD. Group revenue improved by 12% YoY to RM317.2m as a result of higher rig utilisation of 75% (1H19: 66.5%) while DCR remained flattish YoY resulting in a core profit of RM12.1m (YoY: -RM10.6m).

Outlook. We believe that exploration drilling would continue to suffer from Petronas’ lower capex spending. Our blended utilisation rate assumption for Velesto energy remains at c.55%. Assuming no renewal of contract extensions, Velesto Energy would be left with 3 chartered rigs in 3QFY20 and only 2 chartered rigs in 4QFY20. We have assumed that Velesto will be able to secure several 6 to 9 months contract next year to bring its total average utilisation to 50% and we expect daily charter rates to remain flat at about USD70,000/day.

Forecast. Unchanged as we expect a significantly weaker 2H20 as a result of lower utilisation rates for its rigs.

Maintain SELL, TP: RM0.12. Maintain SELL recommendation with unchanged TP of RM0.12 based on 0.35x (-1.2SD below 5 year mean) FY20 BVPS. We believe that Velesto would need to secure more rig contracts from Petronas for us to warrant a re rating on our call.

Source: Hong Leong Investment Bank Research - 26 Aug 2020