Velesto reported 4Q21 core profit of RM13.9m (QoQ: -RM69.1m, YoY: -RM32.7m), bringing FY21 core loss to -RM185.6m (FY20: -RM27.3m). The result came in above our (FY21f: -RM213.1m) but below consensus (FY21f: -RM166.3m) expectations. Key variance against our forecast was due to higher-than-expected blended drilling rig utilisation rates. We are forecasting Velesto to turn profitable in FY22-23 as we expect to see a pick-up in drilling rig tenders this year amidst the current high crude oil price. Maintain BUY with an unchanged TP of RM0.18 based on 0.7x FY22 P/B (from 0.65x FY21 P/B previously).

Above ours, but below consensus. Velesto reported 4Q21 core profit of RM13.9m (QoQ: -RM69.1m, YoY: RM32.7m), bringing FY21 core loss to -RM185.6m (FY20: - RM27.3m). The result came in above our (FY21f: -RM213.1m) but below consensus (FY21f: RM166.3m) expectations. Key variance against our forecast was due to higher-than-expected blended drilling rig utilisation rates. FY21 core loss was derived after adjusting for mainly for: (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 73% increase in revenue and a core profit of RM13.9m (QoQ: -RM69.1m) in 4Q21 due to a higher rig blended utilisation rate of 78% (compared to 51% in 3Q21).

YoY. Revenue increased by 60% with a core profit of RM13.9m in 4Q21 (from -RM32.7m in 3Q20) due to higher rig blended utilisation rate of 78% (vs. 50% in 4Q20).

YTD. Velesto reported a core loss of -RM185.6m (from core losses of -RM27.3m) due to lower rig blended utilisation at 48% in FY21 (vs. 66% in FY20).

Outlook. We are forecasting Velesto to turn profitable in FY22-23 as we expect to see a pick-up in drilling rig tenders this year amidst the high current crude oil price which will lead to increased activity in the O&G space. We believe that Velesto would not use the Naga 7 insurance proceeds to acquire a new rig as it will continue to optimise its assets and continue improving its balance sheet. Net debt and net gearing stood at RM289m and 0.13x as at end-December 2021 (vs. a net debt and net gearing of RM793m and 0.35x a year ago).

Forecast. We make no changes to our FY22-23F earnings estimates. While blended utilisation levels in 1Q22 is expected to remain lukewarm due to the annual timeline of clients’ capex planning cycle, we expect Velesto to perform better in FY22 (compared to FY20-21).

Maintain BUY, TP of RM0.18. Maintain BUY with an unchanged TP of RM0.18 based on 0.7x FY22 P/B (from 0.65x FY21 P/B previously).

Source: Hong Leong Investment Bank Research - 1 Mar 2022