Velesto reported a 2Q22 core net loss of -RM43.2m (QoQ: -RM46.2m, YoY: -RM53.2m), which brought 1H22 core net loss to -RM89.4m (1H21: -RM135.5m). We deem the results to be below our expectations (FY22f: RM5.1m) but within consensus (FY22f: -RM11.1m). We highlight that based on our ground checks, Velesto’s rig schedule would be more occupied in 2H22 and the group would see higher blended rig utilisation rates throughout the next two quarters. Also, we are forecasting Velesto to turn profitable in FY23-24f as we expect to see a pick-up in drilling rig tenders this year amidst the current high crude oil price. Maintain BUY on Velesto Energy with a lower TP of RM0.15 based on 0.6x FY22f P/B (from RM0.18 based on 0.7x FY22f P/B previously).

Below ours but within consensus. Velesto reported 2Q22 core net loss of -RM43.2m (QoQ: -RM46.2m, YoY: RM53.2m), which brought 1H22 core net loss to -RM89.4m (1H21: RM135.5m). We deem the results to be below our expectations (FY22f: RM5.1m) but within consensus (FY22f: -RM11.1m) full-year estimates. Key variance against our estimates was due to a lower-than-expected blended rig utilisation rate in 2Q22.

Dividends. No dividends were declared, as expected.

QoQ. Velesto’s 2Q22 revenue was up 12% QoQ while core net loss narrowed slightly to -RM43.2m (1Q22 loss: -RM46.2m) mainly due to a slightly higher blended rig utilisation rate of 41% (compared to 39% in 1Q22).

YoY. Revenue was up marginally by 4% and core net loss shrunk to -RM43.2m in 2Q22 (from -RM75.0m in 2Q21) due to higher blended rig utilisation rate of 41% based on 6 rigs (vs. 38% in 2Q21 based on 7 rigs).

YTD. Revenue improved by 29% while core net loss narrowed by 34% to -RM89.4m (1H21: -RM135.5m) due to higher blended rig utilisation rate of 40% in 1H22 (based on 6 rigs) vs. 33% in 1H21 (based on 7 rigs).

Outlook. We highlight that based on our ground checks, Velesto’s rig schedule would be more occupied in 2H22 and the group would see higher blended rig utilisation rates throughout the next two quarters. Also, we are forecasting Velesto to turn profitable in FY23-24f 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. Net debt and net gearing stood at RM343m and 0.15x as at end-June 2022, which we deem to be healthy.

Forecast. We now forecast net losses of -RM26.5m for FY22 (vs. profits of RM5.1m previously) and trim our FY23-24f earnings forecasts by 1% and 56% respectively. While blended utilisation levels in 1Q22 was lukewarm due to the annual timeline of clients’ capex planning cycle, we expect Velesto to perform better in FY22f (compared to FY20-21).

Maintain BUY, TP of RM0.15. Maintain BUY on Velesto Energy with a lower TP of RM0.15 based on 0.6x FY22f P/B (from RM0.18 based on 0.7x FY22f P/B previously).

Source: Hong Leong Investment Bank Research - 30 Aug 2022