We attended Velesto’s 3Q20 Analyst Briefing. According to IHS, Global Jack-up Rig Demand Is Expected to Fall to 327 Rigs (-7% YoY) in FY21 While Jack-up Rig Demand for Malaysia Is Expected to Rise From 8 Rigs in FY20 to 11 Rigs in FY21 Based on Current Market Conditions. The Company Would be Left With 1 Chartered Rig in 1Q21, 2 in 2Q21 and 1 From 2H21 Onwards Based on Current Contracts But We Expect Velesto to Secure C.2-3 More Short-term Contracts in FY21 Due to the Improving Fundamentals in the Oil Market. Average Utilisation Rates Are Expected to Fall by C.10-15% in FY21. Maintain HOLD at TP of RM0.12 Based on 0.35x FY20 BVPS.

We Attended Velesto’s 3Q20 Analyst Briefing With the Following Are Key Takeaways:

Recap. 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 in-line 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.

Macro outlook. According to IHS, there are 440 jack-up rigs available for contracts globally and there are plenty of potential for more rigs to be retired as about 142 rigs are above the age of 30 years, while 298 are below the age of 30 years. Of the 440 rigs available to be contracted in the market, 89 (20%) rigs are idle and 351 (80%) are contracted. New build rigs coming in the year 2021/22/23 globally is expected to be 21/18/2. Velesto believes that there is a high likelihood that new build rigs would come in lower than expected due to weak utilization globally as total jack-up demand is expected to fall from 351 in FY20 to 327 in FY21. 8 rigs are expected to be contracted in FY20 in Malaysia and 11 are expected in FY21.

Status of rigs. Naga 2 has secured short extension from August 2020 until the end of October 2020. Naga 6’s contract is expected to expire in December 2020, Naga 4 is expected to be contracted until 1H21, Naga 7 is expected to be contracted until November 2020 and Naga 8’s long-term contract is only expected to begin in 2Q21. The status of the rigs are in-line with our expected utilization rate for 4Q20 of c.45%.

Daily Charter Rates. DCR was flat over the last 3 quarters. DCR for 3Q20 stood at USD72k (2Q20: USD72k, 1Q20: USD71k). DCR to remain flat going forward.

Cost saving initiatives. Velesto is targeting RM20m in cost savings for the year. YTD cost savings amounted to RM14m and the Company expects an additional RM6m in cost savings in 4Q20.

Outlook. We believe that exploration drilling would continue to suffer from Petronas’ lower capex spending and dividend commitments. However, we believe that there would be several short-term contract awards in FY21 after a slow 2H20 due to the recent recovery in oil prices. While we view that Petronas would continue to be frugal on its capex, we believe that most of the cuts in its capex would come from its international ventures. We expect Velesto’s utilisation rate to range from 50-55% in FY21. Furthermore, its cost savings initiative is expected to mitigate any short-falls in utilisation rates.

Forecast: Unchanged

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 Petronas would have to start ramping up on its exploration spending for us to warrant a re-rating on our call.

Source: Hong Leong Investment Bank Research - 30 Nov 2020