Velesto Energy (Velesto) suffered a wider loss of RM8.2m in 3Q18 on the back of lower drilling rig utilisation rates. This widened cumulative 9M18 losses to RM41.6m, which missed both our and consensus estimates. Although we no longer expect a profit turnaround in FY18, losses have significantly narrowed from the RM154m loss recorded in 9M17 and we therefore maintain our BUY call but at a lower 12-month target price of RM0.30 (from RM0.35).

3Q18 Earnings Missed Expectations…

Velesto’s 3Q18 revenue declined 17% yoy to RM150.3m due to lower rig utilisation rates, which fell from 90% in 3Q17 to 75%. In tandem with the revenue decline, EBITDA margin also contracted 13ppts, and its core loss widened from RM1m to RM8m.

… But Showed Improvement Qoq

The sequential improvement in rig utilisation rate (from 59% in 2Q18 to 75%) also resulted in core losses narrowing qoq from RM20m to RM8m. While revenue increased by 34% yoy, operating costs also increased in tandem, which resulted in a mere 0.6ppt improvement. The deviation from our forecast was due to our more bullish DCR and margin improvement assumptions, as our full-year FY18 utilisation assumption of 71% was broadly in line with 9M18’s actual rate of 66%, and we anticipate a stronger 4Q.

Slash Forecasts on Lower DCR

We cut our FY18 forecasts to a loss by lowering our margin forecasts and average DCR assumption to US$69,000 while keeping our utilisation rate assumption unchanged at 71%. Our FY19-20E utilisation rate assumptions remain unchanged at 73% and 81%, respectively, but we lower our earnings estimates on revised DCRs at US$71,000 and US$74,000 respectively.

Maintain BUY

We maintain our BUY call with a lower DCF-based target price of RM0.30 (from RM0.35). Key downside risks to our BUY call would be lower-thanexpected utilisation rates and daily charter rates.

Source: Affin Hwang Research - 26 Nov 2018