4Q core loss of -RM32.7m (QoQ: -RM6.6m, YoY: RM8.0m) and FY20 core loss of - RM27.3m (SPLY: RM30.4m) was below our (FY20f: -11.6m) and consensus (FY20f: -RM21.2m) expectations due to lower than expected utilisation rates for its drilling rigs. Nevertheless, we expect to see a pick-up in drilling rig activity sequentially as we believe that Petronas would have a higher propensity to spend on capex going forward. Rig utilisation stood at 50% in 4Q20 (3Q20: 60%) and 66% in FY20 (FY19: 80%). Maintain HOLD at unchanged TP of RM0.18 based on 0.65x (from 0.5x) FY21 BVPS.

Below expectations. 4Q20 core loss of -RM32.7m (QoQ: -RM6.6m, YoY: RM8.0m) brought FY20 core loss to -RM27.3m (SPLY: RM30.4m). We deem this results to be below our (FY20f: -RM11.6m) and consensus forecast (FY20f: -RM21.2m) due to lower than expected utilisation for its drilling rigs. FY20 core loss was derived from our adjustments on forex losses amounting to RM3.9m and impairments amounting to RM460.6m. No dividends were declared for the year, in-line with expectations.

QoQ. Velesto recorded a higher core loss of -RM32.7m (QoQ: -RM6.6m) in 4Q20 due to lower effective utilisations for its drilling rigs. Utilisation rates for 4Q20 stood at 50% (3Q20: 60%), 10ppt lower, while DCR was flat QoQ at about USD70k. Consequently, EBITDA margin stood at 60% (3Q20: 51%) due to additional cost saving measures implemented during the quarter.

YoY. Revenue declined by 42% YoY as a result of lower utilisation rates (4Q19: 86%) while DCR has remained flat YoY. Consequently, core losses stood at -RM32.7m (YoY: RM33.0m).

YTD. Group revenue declined by 15% YoY to RM535.6m as a result of lower rig utilisation of 66% (FY19: 80%) while DCR remained flattish YoY resulting in a core loss of -RM27.3m (YoY: RM30.4m).

Outlook. We view that the outlook for Velesto is turning positive at this juncture despite its weak 4Q20 results as we expect to see a pick-up in Petronas’ propensity to spend in 2H21 and we believe that Velesto would be able to secure more short-term contracts in 2H21. We opine that the recent securement of contracts for Naga 2 and Naga 5 is a good leading indicator towards its better prospects. While we expect its 1Q21 results to be the weakest of FY21, the Company should see sequential improvements in its rig utilisation and profits towards the end of FY21. We forecast Velesto’s utilisation rate to come in at c.50% in FY21 and expect its cost savings initiative to mitigate any short falls in utilisation rates.

Forecast. Unchanged.

Maintain HOLD, TP: RM0.18. Maintain HOLD recommendation with unchanged TP of RM0.18 based on 0.65x (from 0.5x) FY21 BVPS as adjust for its impairments on book value in 4Q20. We believe that Velesto would need to secure more rig contracts from Petronas for us to warrant a re-rating on our HOLD call.

Source: Hong Leong Investment Bank Research - 25 Mar 2021