Velesto Energy’s (Velesto) 1Q19 loss was not a surprise, with rig utilisation at 66%, which was close to what we had earlier anticipated. Notwithstanding, we believe our previous margin assumption was likely too conservative, prompting us to raise our 2019E EPS. We reaffirm our BUY rating on the back of the positive outlook, with an unchanged target price of RM0.40.

Loss Not a Surprise; But Results Deemed Above Our Forecast

Velesto’s 1Q19 core loss of RM22.7m is deemed to be in line with consensus but ahead of our forecast, in anticipation of a stronger 2H19 performance. Operationally, 1Q19 revenue grew 4.3% yoy to RM127m driven by a slight improvement in drilling rigs utilisation (66% vs. 65% in 1Q18) and higher daily charter rates, but offset with a weaker oilfield services segment following the cessation of the Labuan operation. Revenue was also supported by a favourable US$ which appreciated by 4% yoy. The RM6m widen loss was mainly attributed to higher depreciation charges and lower interest income.

Sequentially Weaker Result as 3 Rigs Were in MMHE Yard

Revenue fell by 33% qoq, resulting in a net loss of RM22.7m. This was affected by a lower rig-utilisation rate, which declined from 91% in 4Q18 to 66%, primarily due to 3 idle rigs that were in MMHE’s fabrication yard with Naga 5 and 6 both for SPS work, while Naga 2 underwent leg repair work.

Reaffirm BUY Rating and TP of RM0.40

We raised our 2019E earnings by RM6m, as we imputed in a higher margin assumption on greater cost savings. We reaffirm our BUY call and DCFbased target price of RM0.40, using a 2020E base year. We remain positive on Velesto on the back of recovering drilling rig prospects with Petronas jackup rig demand expected to increase to 16-18 rigs in 2019 (from 7-10 in 2018). In addition, we believe Velesto, as Malaysia’s largest jack-up operator with a younger fleet than others, has an edge over its competitors in terms of securing new contracts. Downside risks to call: lower-than-expected utilisation rates led by delays in contract wins and lower daily charter rates.

Source: Affin Hwang Research - 23 May 2019