Strong 3QFY19 results exceeded expectation on stellar rigs’ utilisation rates of 92%, further solidifying its turnaround story. Moving forward, 4QFY19 could be sequentially weaker as two of its rigs (namely Naga 3 and 7) will undergo a mandatory five-yearly Special Period Survey, but outlook for FY20 seems strong nonetheless, with most of its rigs having secured contracts. Maintain OUTPERFORM, with higher TP of RM0.43.

Above expectation. VELESTO recorded 9MFY19 core net profit of RM23.8m, smartly beating our expectation at 57% above our full-year forecast due to stronger-than-expected margins. However, the results were within consensus estimates at 75%, although we do acknowledge that some of the consensus constituents were quite skewed with their numbers. No dividends were announced, as expected.

Strong results backed by healthy utilisation. Cumulative 9MFY19 managed to turn around YoY from core loss of RM8.3m, thanks to better utilisation (77% vs 67%). Similarly for 3QFY19, core net profit of RM34.7m was a reversal YoY from core loss of RM8.3m, also on the back of stronger rig utilisation (92% vs. 75%). Sequentially, 3QFY19 CNP virtually tripled, as the quarter recorded higher utilisation (92% vs. 74%).

Expecting a stronger year ahead. Going into the 4QFY19, we believe it is reasonable to see a slight dip in earnings. Utilisation is expected to be lower from this quarter’s stellar 92% utilisation, as two of its rigs (particularly, Naga 3 and 7) will be undergoing a mandatory five-yearly Special Periodic Survey (SPS). Nonetheless, we see the outlook going into FY20 to be stronger, as most of its rigs have already secured contracts at hand throughout most of the year, thus providing certainty in utilisation rates. We expect the upcoming contract award to likely go to Naga 4, with the rig due to be out of contract in end-1QFY20 (currently servicing Roc Oil). Upcoming contract wins should be able to fetch daily charter rates of around USD70-80k/day.

Maintain OUTPERFORM. Post-results, we raised our FY19E/FY20E earnings by 94%/8%, after raising our margins assumptions. Our numbers are based on these assumptions; (i) 80%/90% utilisation, and (ii) USD72k/USD75k daily charter rates, respectively. Following this, our TP has also been raised to RM0.43 (from RM0.40 previously), pegged to 1.2x PBV, which is still close to -1.5SD below its 5-year mean.

We continue to like VELESTO given the improving certainty in its turnaround story, with clear earnings visibility for the next 1-2 years. Key catalysts would include continued earnings delivery, and further contract awards. The name is also an ESG-play within the oil and gas sector, being a constituent of the FTSE4GOOD index.

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

Source: Kenanga Research - 29 Nov 2019