Velesto reported 2Q21 core loss of -RM77.2m (QoQ: -RM53.2m, YoY: -RM8.3m), bringing 1H21 core loss to -RM131m (YoY: RM12.1m). The result was below our (FY21f: -RM51.2m) and consensus (FY21f: -RM60.0m) expectations due to the spill over of operational cost from the Naga 7 accident, despite higher utilisation rates for its drilling rigs. Nevertheless, we expect to see a pick-up in drilling rig activity in 2H21. We believe that Velesto would not use the proceeds from its insurance claim for capex or business expansion as the Company is still looking to de-gear further, while also optimising its efficiency. Maintain BUY at unchanged TP of RM0.18 based on 0.65x (unchanged) FY21 BVPS.

Below expectations. Velesto reported 2Q21 core loss of -RM77.2m (QoQ: -RM53.2m, YoY: -RM8.3m), bringing 1H21 core loss to -RM131m (YoY: RM12.1m). We deem this results to be below our (FY21f: -RM51.2m) and consensus forecast (FY21f: -RM60.0m) due to additional operational costs incurred from the Naga 7 accident. 1H21 core loss was derived after adjusting for -RM86.3m worth of EIs, mainly comprising of (i) asset written off (Naga 7) amounting to RM461m and (ii) insurance claims amounting to - RM559m. No dividend was declared, as expected.

QoQ. Velesto recorded a higher core loss of -RM75.0m (QoQ: -RM53.2m) in 2Q21 due the spill over of additional operating cost from the Naga 7 accident despite higher effective utilisations for its drilling rigs. Utilisation rates for 2Q21 stood at 38% (1Q21: 28%), 10ppt higher.

YoY. Revenue declined by 41% as a result of lower utilisation rates (2Q20: 67%) and additional cost incurred from the Naga 7 accident. Consequently, core losses stood at -RM75.0m (YoY: RM8.3m).

YTD. Velesto’s core loss of -RM131m (from core profit of RM12.1m) was due to the same reasons mentioned above

Outlook. We view the outcome of the insurance claim positively and believe that Velesto will achieve higher utilisation in FY22 due to (i) higher and more stable oil prices, (ii) increased activity in the O&G space and (iii) the recovering global economy. We believe that Velesto would not use the proceeds to acquire a new rig as it will continue to optimise its assets to achieve a better utilisation rate.

Forecast. We revise our FY21 net loss forecast from -RM51.2m to -RM163m to factor in the additional operational cost incurred from Naga 7 while maintaining our FY22/23 forecast as our stance on its positive future outlook remains.

Maintain BUY with lower TP of RM0.18. Maintain BUY recommendation with TP of RM0.18 based on 0.65x (unchanged) FY21 BVPS as we factor in the operational staff limits imposed from the NRP and the weaker than expected utilisation rates in 2Q21. We believe that the worst is over for Velesto as its utilisation rates for its rigs are expected to improve in 2H21.

Source: Hong Leong Investment Bank Research - 26 Aug 2021