VELESTO saw its 2QFY20 quarter plunging into losses on the back of lower jack-up rig utilisation on top of Covid-19- related additional costs. Moving forward, charter outlook for its rig seems uncertain, with Petronas Carigali still understood to have yet to exercise its contract extension option for four of VELESTO’s rigs. Maintain UP, with reduced TP of RM0.13.

1HFY20 deemed below expectations. 1HFY20 recorded core net profit of RM12.1m (arrived after stripping off forex) against our/consensus full-year earnings forecasts of RM25.8m/RM8.4m. Nonetheless, results were deemed to be below our expectation, in anticipation of a weaker 2HFY20 given the uncertainty in rig utilisation outlook. No dividends were announced, as expected.

Quarter plunged into losses. 2QFY20 plunged into core loss of RM8.3m, from core profit of RM11.8m in 2QFY19 and RM20.4m in 1QFY20. This was caused by lower jack-up rig utilisation, which fell to 67% during the quarter, versus 74% in 2QFY19 and 84% in 1QFY20. Furthermore, an additional RM11m expenses was also incurred during the quarter in relation to the Covid-19 pandemic. Cumulatively, 1HFY20 turned around from core losses of RM10.9m YoY, largely thanks to the strong 1QFY20 performance. Rig utilisation YTD stands at an average 75%, versus 1HFY19 of 70%.

Uncertainty in outlook. Moving forward, uncertainties still linger for its rig utilisation outlook. Three of its rigs chartered to Petronas Carigali (namely Naga 2, 5 and 6) have still yet to see its extension option being exercised, despite their firm period contracts expiring in the coming months. While shorter-term jobs are understood to be awarded to temporarily fill up the rigs’ idle time and boost up utilisation for the time being, we largely believe that utilisation could come in comparatively weaker against 2019 level of 80%.

Maintain UNDERPERFORM. Post-results, we slashed our FY20/21E numbers to losses of RM39.3m/RM12.2m (from profits of RM25.8m/RM32.1m previously) as we lowered our rig utilisation assumption to 70% (from 75% previously). Following so, our TP is also reduced to RM0.13 (from RM0.14 previously), pegged to 0.4x PBV at - 2SD from its 3-year mean.

Risks to our call include: (i) unexpected recovery in utilisation, (ii) stronger-than-expected charter rates, (iii) higher-than-expected margins, and (iv) weaker-than-expected Ringgit

Source: Kenanga Research - 26 Aug 2020