3Q core loss of -RM6.6m (QoQ: -RM8.3m, YoY: RM33.0m) and 9M20 core profit of RM5.5m (-76% YoY) was within our expectations (FY20f: -RM11.6m) but above consensus’ (FY20f: -RM57.2m). No changes to our estimates as the results were in-line with expectations. We expect a weaker 4Q20 due to lower utilisation based on current contracts awarded and we believe that Petronas would continue to be prudent with regards to its spending on exploration activities. Rig utilisation stood at 60% in 3Q20 (2Q20: 67%) and 68% in 9M20. Maintain HOLD 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. 3Q20 core loss of -RM6.6m (QoQ: -RM8.3m, YoY: RM33.0m) brought 9M20 core profit to RM5.5m (-76% YoY). We deem this results to be inline with our forecast (FY20f: -RM11.6m) given expectation for losses in 4Q, but above consensus (FY20f: -RM57.2m). 9M20 core loss was derived from our adjustments on forex losses amounting to RM3.9m. No dividends was declared, none expected for the year.

QoQ. Velesto recorded a lower core loss of -RM6.6m (QoQ: -RM8.3m) in 3Q20 due better effective cost optimisation measures implemented during the quarter despite lower utilisation rates. Utilisation rates for 3Q20 stood at 60% (2Q20: 67%), 7ppt lower, while DCR was flat QoQ at about USD70k. Consequently, EBITDA margin stood at 51% (1Q20: 45%).

YoY. Revenue declined by 37% YoY as a result of lower utilisation rates (3Q19: 92%) while DCR has remained flat YoY. Consequently, core losses stood at –RM6.6m (YoY: RM33.0m).

YTD. Group revenue declined by 9% YoY to RM447.9m as a result of lower rig utilisation of 68% (9M19: 77%) while DCR remained flattish YoY resulting in a core profit of RM5.5m (-76% YoY).

Outlook. We believe that exploration drilling would continue to suffer from Petronas’ lower capex spending. Assuming no renewal of contract extensions, we expect Velesto Energy to only achieve an average utilisation of about c.45% 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. However, Velesto has been successful in its efforts to reduce operating costs and we do not expect the magnitude of losses recorded next year to be as huge as what it was in FY16-17 even with significantly lower utilisation rates.

Forecast. Unchanged as we expect a 4Q20 results to be weaker than 3Q20.

Maintain HOLD, TP: RM0.12. Maintain HOLD 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 rerating on our call.

Source: Hong Leong Investment Bank Research - 27 Nov 2020