Velesto Energy (Velesto) registered an earnings turnaround and posted its strongest profit since 1Q15 on the back of a higher jack-up fleet utilisation rate and continual cost rationalisation, although earnings will likely remain volatile in the quarters ahead due to gaps between jobs, with the 1Q19 outlook looking weak. Nevertheless, with a brighter Petronas activity outlook, financial restructuring and asset impairments completed, the overall earnings outlook for 2019 is looking up. We had highlighted Velesto as one of our alpha picks in early 2019 – maintain BUY call and 12-month target price of RM0.30.

Earnings Above Expectations

Velesto’s losses in the earlier part of 2018 narrowed significantly to RM16m, largely driven by lower finance expenses and operating costs, which were down 9% yoy. This resulted in a 4ppt improvement in the EBITDA margin to 43% (2017: 39%). Revenue declined 2% yoy, despite a higher jack-up utilisation rate of 73% (2017: 70%) due to the stronger RM. The results are above our and consensus estimates for losses of RM23- 34m.

Earnings Turnaround on High 91% Utilisation in 4Q18

Sequential revenue grew 26% qoq to RM189m on the back of a higher jack-up fleet utilisation rate of 91% as compared to 75% in 3Q18. The EBITDA margin also improved in tandem, up 13ppts to 52%, which translated into a strong profit of RM26m.

Softer 1Q19 Expected; Maintain BUY

We expect 1Q19 to look softer sequentially as only 4 of its 7 jack rigs are currently working, translating into a 57% utilisation rate, assuming all four units are fully utilised. Nevertheless, the outlook for 2019 remains positive as demand for jack-up rigs in Malaysia is expected to increase to 16-18 rigs in 2018 (from 7-10 rigs in 2017), according to Petronas’ activity outlook. We make no changes to our earnings forecasts, BUY call or DCFbased target price of RM0.30. Key downside risks to our BUY call would be lower-than-expected utilisation rates and daily charter rates.

Source: Affin Hwang Research - 28 Feb 2019