Profit for 2018 Looking Possible

UMWOG started trading under a new name, Velesto Energy, today as part of its restructuring initiative. 1Q18 results which fell back into core losses was however above our expectations. We believe that Velesto will be able to achieve a full-year profit in 2018. Short-term borrowings fell from 25% to 3% of total borrowings, while net gearing fell from 0.44x to 0.39x. We maintain our BUY call, but with a lower 12- month target price of RM0.35.

1Q18 Still at Loss, But Above Our Expectations

Velesto’s 1Q18 core net losses narrowed to RM13.2m, as compared to the loss of RM103.3m recognised in 1Q17. This was achieved with a higher revenue (+64%) with 5 working rigs as compared to 3 rigs in 1Q17. EBITDA margin turned from negative to 39%, in tandem with the improving utilisation rate. The lower depreciation (-34.4%) and finance cost (-43.8%) post restructuring also helped lift the overall results.

Weaker Qoq Results

Velesto’s 1Q18 revenue of RM121.8m was down 36.5% qoq due to lower rig utilisation with 5 working rigs (4 on full quarter contribution) as compared to 7 working rigs (5 on full quarter contribution) in 4Q17. EBITDA margin mirrored the revenue decline and contracted by 10.4ppts.

Raising Our Earnings Forecasts

We raised our 2018-19E earnings forecasts from a loss of RM82m/RM51m to RM8m/RM32m profit as we had previously underestimated the quantum of interest cost savings and lower depreciation post restructuring. We make no changes to our rig utilisation assumptions, which remain at 71-73%. There are 5 rigs currently in operation with an additional 2 rigs expected to be mobilised in 3Q. Not all will show a full quarter contribution for the rest of the quarters, but we believe rig utilisation will show a vast improvement in 2018.

Maintain BUY; Lower TP of RM0.35

We maintain our BUY call with a lower DCF-based target price of RM0.35 (from RM0.40). Key downside risks to our BUY call would be lower-thanexpected utilisation rates and daily charter rates.

Source: Affin Hwang Research - 25 May 2018