Velesto Energy’s (Velesto) 2Q19 result is deemed in line with our forecasts. The stronger profit was largely contributed to a positive tax impact led by a reversal of over-accrued tax in 1Q19. We maintain our BUY call but lower our 12-month TP to RM0.37 (from RM0.40) to factor in the enlarged share base of the recently announced ESOS.

Earnings Deemed in Line

Despite recording a 74% rig utilisation in 2Q19, Velesto reported a core net profit of RM11.8m. This was largely driven by a positive tax effect as a result of reversal of the 1Q19 over-provision and the mobilisation of Naga 2, 3 and 5. This narrowed 6M19 losses to RM11m (-71% yoy), with average rig utilisation higher at 70%, compared to 62% in 6M18. Overall, we deem the result to have missed the consensus’ higher profit forecast of RM25m, but in line with ours.

Sequential: Loss to Profit

Velesto swung from a RM22.8m loss in 1Q19 to a RM11.8m profit in 2Q19. This was driven by a 24% qoq jump in revenue as a result of higher rig utilisation (74% in 2Q19 vs 66% in 1Q19). As such, EBITDA margins improved 11.6 ppts qoq to 48.8% in 2Q19.

Expecting 3Q19 Drilling Utilisation to Rise to About 90%

We expect 3Q19 drilling rig utilisation to rise to ~90% on the back of a fullquarter contribution from Naga 2, 3 and 5. Naga 4 and 8 should see a similar high utilisation qoq, barring any negative surprises. The Naga 6 utilisation rate is likely to be c.50% as it underwent a 1.5-month of SPS exercise from mid-July to end-August. Lastly, Naga 7 has delayed the start of its shortterm contract with Petronas Carigali until October, after finishing its contract with Murphy in July, and will be undergoing a SPS exercise from midOctober until end-November, before starting the Shell contract.

Maintaining Our BUY Call

We recommend investors to position for a strong 2H19 earnings recovery, with average rig utilisation expected to rise to ~90%. We make no changes to our earnings model. We maintain our BUY call but lower our DCF-based 12-month target price to RM0.37 (from RM0.40), factoring in the enlarged share base after the proposed ESOS exercise announced last Friday.

Source: Affin Hwang Research - 3 Sept 2019