VELESTO: Earnings rebound on the horizon

Upcoming results to rebound strongly. To recap, VELESTO reported a significant decline of -93% QoQ and -92% YoY in its 3Q23 earnings, amounting to a mere RM1.2m. The underwhelming performance was mainly attributed to a reduction in JU rigs utilisation, falling from 88% to 60% QoQ, due to respective maintenance and SPS works in four of its fleets. However, with all its JU rig fleets running at full steam in 4QFY23, alongside higher DCR negotiated with Petronas, we expect a steep rebound in VELESTO’s earnings going forward.

Favourable JU rigs outlook. Global drilling market is currently undergoing an upward cycle due to drilling rigs crunch, leading to robust utilisation rate and strong bargaining power for rig owners in pricing DCRs. The global rig market is nearing full utilisation (>90%) as contracted rigs have been rising in recent quarters while supply has decreased due to rising demand for drilling activities. The JU rigs crunch is even more severe if we drill down to the SEA region where all available rigs have been fully utilised as at Nov-23 with DCR as high as USD145-165k, an increase of 40-60% YoY. Apart from growing demand for JU rigs in the SEA region, Middle East has been soaking up the JU rigs from other regions as its JU rigs demand rose more than 20% this year. This dynamic presents a favourable scenario for VELESTO, endowing the company with enhanced negotiating power when dealing with oil majors.

As umbrella contract with Petronas is due for renewal in 1Q24, we are confident that Naga 2, 4 and 5 will be occupied in 2H24 while locking in a higher DCR ranging from USD120-135k/day. It is noteworthy that our current forecast assumes a secured DCR of USD120k, which is below the recently negotiated USD135k/day for Naga 8. This indicates the potential for an upside surprise. All in, we project VELESTO's FY24 earnings to witness a substantial 101% jump, reflecting a quarterly run rate of RM36.1m compared to FY23's RM17.9m.

U-shaped rebound. Technically, VELESTO is pending for a U-shaped rebound, with indicators showing uptick bias. A strong breakout on its neckline RM0.25 level will spur the price toward RM0.28-0.30-0.31 levels. Cut loss at RM0.22.

Collection range: RM0.23-0.24-0.245

Upside targets: RM0.28-0.30-0.31

Cut loss: RM0.22

Source: Hong Leong Investment Bank Research - 11 Jan 2024