2Q18: In Line; Jack-up Engines Warmed Up

Velesto Energy’s (Velesto) 2Q18 losses narrowed 59% yoy. While 1H18 has narrowed significantly on the back of higher revenue and lower overheads, we believe the best has yet to come as earnings momentum will be stronger with the recent drilling contract wins for NAGA-3,-4,-5-and-7. A post-results briefing will be conducted later morning. As Velesto’s results are in line, we maintain our earnings forecasts, BUY call and 12-month target price at RM0.35.

Results in Line With Expectations

Velesto’s 2Q18 revenue came in at RM112m, down 8% qoq and 20% yoy. This accounted for 40% of our full-year estimate, which we deem to be in line with our forecasts, in anticipation of a stronger 2H18. Although there was 1 additional rig working during the quarter (6 units compared to 5 units in 2Q17), overall utilisation rate was actually lower at 59% (vs. 68%) as only two rigs contributed to a full quarter, while the remaining 4 units did not contribute to the full quarter. 2Q18 EBITDA margin rose 6.7ppts yoy to 38% due to lower operating costs.

Lower Rig Utilisation Qoq

Sequentially, both revenue and earnings were softer due to a lower rig utilisation rate at 59%, compared to 65% in 1Q18 as only two rigs contributed to a full quarter. This also resulted in a small margin squeeze in 2Q18, down 1.1ppts to 38%.

Maintain BUY; Retain Our RM0.35 Target Price

Our view of a stronger 2H18 earnings remains intact as 5 out of the total 7 jack-up rigs are currently working and 2 more rigs expected to be mobilised before August 2018, most with visibility until the end of FY18. The higher utilisation rates, coupled with lower depreciation and interest cost savings post restructuring, are expected to push Velesto towards an earnings turnaround in FY18. We maintain our BUY call with an unchanged DCFbased target price of RM0.35.

Key downside risks to our BUY call would be lower-than-expected utilisation rates and daily charter rates.

Source: Affin Hwang Research - 21 Aug 2018