VELESTO secured a contract for Naga 7 jack-up drilling rig, worth USD8m, expected to commence in 3Q19. We reckon the contract duration to be around 3-4 months, fetching daily charter rates of ~USD70k/day and EBITDA margins of ~45%. No changes to our FY19-20E numbers, as it is within our utilisation (80-85%) and charter rate (USD72k/day) assumptions. Maintain OUTPERFORM with TP of RM0.35.

Naga 7 contract from Petronas Carigali. VELESTO announced that it received a letter of award from Petronas Carigali for the provision of jack-up drilling rig “Naga 7”. The contract is to drill two firm wells with an estimated contract value of USD8m, and is expected to commence in 3Q19.

Impact from the contract. While no contract period was included in the announcement, we reckon the contract duration to be around ~3-4 months (i.e. ~90-120 working days). As such, we believe the contract should be based on daily charter rates of near to ~USD70k/day (excluding other value-added services), and should be able to fetch EBITDA margins of around ~45%. No changes to our FY19-20E numbers post-contract award, as we deem it to be within our utilisation assumption of 80-85%, with the charter rates also broadly within our imputed assumption of USD72k/day.

Positive on the contract. Overall, we are positive on the contract announcement, highlighting VELESTO’s position as a prime beneficiary of increased jack-up drilling rigs demand in the country, as well as providing further utilisation and earnings visibility. With the contract for Naga 7 now secured, we believe no further contracts are necessary for the rest of 2019, as all its rigs should already have contracts at hand until at least end of the year.

Maintain OUTPERFORM, with unchanged TP of RM0.35 pegged to 1x FY20E PBV – roughly in-line with its 2-year mean valuations. Postresults, we made no changes to our FY19-20E numbers. We continue to like VELESTO given the certainty of its turnaround story, clear earnings visibility for the next 1-2 years, while we also see limited downside risks from current share price levels. Additionally, the company reportedly had also demonstrated satisfactory environmental, social and governance practices, being one of the new names within the oil and gas industry to be included into the FTSE4Good Bursa Malaysia Index. That said, we believe a range-bound trading strategy of RM0.30-0.35 would suit the stock.

Risks to our call include: (i) poorer-than-expected rigs utilisation, (ii) weaker-than-expected charter rates, and (iii) lower-than-expected margins.

Source: Kenanga Research - 5 Sept 2019