Velesto reported a 4Q22 core net profit of RM2.6m (-82% QoQ, -52% YoY), which brought FY22 core net loss to -RM71.8m (FY21: -RM182.1m). We deem the results to be below ours (FY22f: -RM17.9m) and consensus expectations (FY22f: -RM27.9m). We are expecting a substantially stronger showing in FY23 as Velesto has guided at significantly higher utilisation rates and daily charter rates for its jack-up drilling rigs. With that, we are forecasting Velesto to turn profitable in FY23-24 as we expect to see a pick-up in drilling rig tenders this year amidst the current elevated crude oil price environment, leading to increased activity in the sector. We downgrade Velesto Energy to SELL with a lower TP of RM0.21 – pegged to an unchanged P/E multiple of 14x on revised FY24f profits. We think Velesto’s valuations are rich and has gone past its fundamentals despite its strong turnaround prospects and growth trajectory.

Below expectations. Velesto reported a 4Q22 core net profit of RM2.6m (-82% QoQ, -52% YoY), which brought FY22 core net loss to -RM71.8m (FY21: -RM182.1m) – after having adjusted for: (i) RM15.1m reactivation costs in mobilising its workover unit which was idle for a long period; and (ii) RM13.5m recognition of tax related to prior years incurred in 4Q22. We deem the results to be below ours (FY22f: -RM17.9m) and consensus expectations (FY22f: -RM27.9m). Key variance against our forecast was mainly caused by higher opex and RM15.2m of inventory movement adjustments throughout the quarter.

Dividends. No dividends were declared, as expected.

QoQ/YoY. Velesto recorded a 40%/53% increase in revenue QoQ/YoY in tandem with higher blended rig utilisation rate of 90% in 4Q22 (compared to 78% in 3Q22 and 4Q21). However, core net profit shrunk -82%/-52% QoQ/YoY – mainly due to higher opex and recognition of RM15.2m of inventory movement adjustments throughout the quarter.

YTD. Revenue improved by 54% while core net loss narrowed by 60% to -RM71.8m (FY21: -RM182.1m) due to higher blended rig utilisation rate of 62% in FY22 vs. 48% in FY21.

Outlook. We are expecting a substantially stronger showing in FY23 as Velesto has guided at significantly higher utilisation rates and daily charter rates for its jack-up drilling rigs. With that, we are forecasting Velesto to turn profitable in FY23-24 as we expect to see a pick-up in drilling rig tenders this year amidst the current elevated crude oil price environment, leading to increased activity in the sector. However, we are wary of cost hikes in the OGSE space due to cost inflation woes amidst the heightened oil and gas demand coupled with global supply chain disruptions, impacting the availability of oilfield equipment and spares.

Forecast. Cut FY23-24f forecasts by 33% and 27% respectively to account for lower EBITDA margin assumptions due to higher operating expenses.

Downgrade to SELL – lower TP of RM0.21. We downgrade Velesto Energy to SELL with a lower TP of RM0.21 (from BUY with a TP of RM0.29 previously) – pegged to an unchanged P/E multiple of 14x on revised FY24 profits. We think Velesto’s valuations are rich and has gone past its fundamentals despite its strong turnaround prospects and growth trajectory.

Source: Hong Leong Investment Bank Research - 28 Feb 2023