1Q21 core loss of -RM53.2m (QoQ: -RM32.7m, YoY: RM20.4m) was below our (FY21f: -RM32.6m) and consensus (FY21f: -RM35.7m) 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 2Q21 utilisation is already significantly higher QoQ. Rig utilisation stood at 28% in 1Q21 (4Q20: 50%) and 84% in 1Q20. Maintain BUY at lower TP of RM0.18 based on 0.65x (from 0.75x) FY21 BVPS.

Below expectations. Velesto reported 1Q21 core loss of -RM53.2m (QoQ: -RM32.7m, YoY: RM20.4m). We deem this results to be below our (FY21f: -RM32.6m) and consensus forecast (FY21f: -RM35.7m) due to lower than expected utilisation for its drilling rigs. 1Q21 core loss was derived from our adjustments on unrealised forex losses amounting to RM7.2m. No dividends were declared for the year, in-line with expectations.

QoQ. Velesto recorded a higher core loss of -RM53.2m (QoQ: -RM32.7m) in 1Q21 due to lower effective utilisations for its drilling rigs. Utilisation rates for 1Q21 stood at 28% (4Q20: 50%), 22ppt lower, while DCR was flat QoQ at about USD70k.

YoY. Revenue declined by 75% YoY as a result of lower utilisation rates (1Q20: 84%) while DCR has remained flat YoY. Consequently, core losses stood at -RM53.2m (YoY: RM20.4m).

Outlook. We view that the outlook for Velesto is turning positive at this juncture despite its weak 1Q21 results as Velesto currently has 3 out of 6 of its available rigs working with another rig to commence mobilisation by the middle of June. 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.45% in FY21 and expect its cost savings initiative to mitigate any short-falls in utilisation rates. Velesto is working with the insurance underwriters and protection & indemnity (P&I) club on the way forward for Naga 7 as the rig and other related liabilities are adequately covered under the Hull & Machinery Insurance and the P&I club. We believe that Velesto would be adequately compensated for Naga 7 and we do not think that Velesto would replace its Naga 7 rig with a new rig.

Forecast. We revise our FY21 net loss forecast from -RM32.6m to -RM51.2m and cut our FY22 forecast by -10.2% to account for the weaker than expected utilisation rate and the absence of contribution from Naga 7.

Maintain BUY with lower TP of RM0.18. Maintain BUY recommendation with lower TP of RM0.18 based on 0.65x (from 0.75x) FY21 BVPS as we factor in the operational staff limits imposed from the total lockdown and the weaker than expected utilisation rates in 1Q21. We believe that the worst is over for Velesto as its utilisation rates for its rigs have already increased substantially in 2Q21 and is expected to improve sequentially.

Source: Hong Leong Investment Bank Research - 1 Jun 2021