• 3Q20 core loss of RM6.6m was smaller compared to what the consensus and us were expecting, due to lower depreciation and finance cost
• 9M20 average rig utilisation at 71% (9M19: 77%); 4Q20 to see utilisation dipping slightly below 40% by our estimate
• Reducing our 2020 core loss forecast on lower cost but doubling our 2021 loss forecast after factoring in lower rig utilisation while raising 2022E profit on lower cost base; reiterate Sell rating and TP of RM0.13

Result positively surprised on lower costs

3Q20 revenue fell 7.3% qoq to RM131m on the back of lower rig utilisation (60% vs 67%) with EBITDA margin falling 3ppts qoq. However, core loss managed to narrow from RM8.3m to RM6.6m mainly due to lower depreciation and finance cost. After adding back RM4m of forex losses, 9M20 headline profit of RM1.6m came in higher at RM5.5m at the core level. This was ahead of consensus and our net-loss forecasts of RM57m and RM25m, respectively.

Expect 4Q20 rig utilization to dip below 40%

We expect 4Q20 rig utilisation to be lower at <40% as some rigs completed their drilling programmes. Naga 3 and Naga 5 will remain out of job in 4Q20, while Naga 8 will be out of job in 4Q20, having completed its earlier job with Carigali Hess. Naga 2 and Naga 6 contracts will be extended into 4Q20 to complete their earlier works. Naga 4 contract with Mubadala remains ongoing.

Revising our assumptions

Our rig utilisation and revenue forecasts were in line for 9M20, but we had overestimated on costs, leading us to reduce our earlier net-loss forecast for 2020 from RM25m to RM9m. We lower our 2021 rig utilisation forecast from 65% to 55% as the rig market remains quiet, leading us to raise our net-loss forecast from RM10m to RM20m. However, we raise our 2022E net profit by 15% after factoring in a lower cost base. We make no changes to our daily charter rate assumption ranging from US$70-71k.

Maintain Sell

We maintain our Sell recommendation on Velesto given the uncertain outlook and pending clearer signals of a capex recovery. No changes to our DCF-based target price of RM0.13. Upside risks: better-than-expected rig utilisation and daily charter rates.

Source: Affin Hwang Research - 27 Nov 2020