Despite lower rig utilisation, 3QFY20 managed to narrow sequential losses to beat expectations due to lower operating costs. Nonetheless, the outlook still lacks some earnings visibility at the moment, as only two of the group’s seven rigs have contract at hand going into next year. Upgrade to MP on recent share price weakness, with unchanged TP of RM0.13.

9MFY20 above expectations. 9MFY20 core net profit of RM5.5m (arrived after adjusting for forex) is deemed to have come in above expectations against our FY20E loss forecast of RM39.3m and consensus of RM57.2m. This was mainly due to the lower-than- expected operating costs, particularly in 3QFY20. No dividends were announced, as expected.

Rig utilisation trending down. YTD-9MFY20 saw core net profit deteriorated 77% YoY, largely due to the lowered jack-up rig utilisation (68% vs 77%). For the individual quarter of 3QFY20, VELESTO plunged into core net loss of RM6.6m, from RM34.7m profit YoY, similarly as a result of lowered rig utilisation (60% vs 92%). However, on a sequential basis, 3QFY20 saw its losses narrowed by 21% QoQ. This was mainly due to lowered operating costs, as in the last quarter the group had recognised additional expenses of RM10.9m arising from the Covid-19 pandemic. The lower expenses in 3QFY20 managed to mask the poorer rig utilisation (60% vs 67%) seen during the quarter.

Expect weaker quarters ahead. We believe weaker quarters are still ahead for VELESTO, as we expect 4QFY20 utilisation to come in lower sequentially. In fact, going into FY21, only two of the group’s seven rigs have contracts at hand (barring any unforeseen rescheduling of works). These are: (i) Naga 4 rig, chartered to Mubadala until 2QFY21, and (ii) Naga 8 rig, chartered to Carigali Hess on a long-term 3-year contract. This comes after Petronas Carigali had lapsed on its extension options for four of VELESTO’s rigs earlier in the year, given the current oil down turn. Overall, with no clear visibility ahead, we believe upcoming quarters could see the continuation of the declining rig utilisation trend.

Upgrade to MARKET PERFORM, with unchanged TP of RM0.13, pegged to 0.4x PBV at -2SD from its 3-year mean valuations. Post- results, we narrowed our FY20E losses by 73% to account for lower costs assumptions. Our call is upgraded to MARKET PERFORM given the recent share price weakness. Nonetheless, unless substantial contract awards materialise, we do not expect any huge catalyst at the moment.

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 - 27 Nov 2020