FY20 losses hugely missed expectations, due to the steep drop in rig utilisation (66% versus 80% last year). Moving forward, we believe 2021 could be an even more challenging year for VELESTO, as demand for local rig remains sluggish. Downgrade to UP with lowered TP of RM0.11.

FY20 hugely missed expectations. VELESTO recorded FY20 core net loss of RM41.5m (arrived after adjusting for RM10.3m gains in forex, and RM460.6m impairment provision expense), greatly missing expectations by coming in at 292% above our loss forecasts, and 50% above consensus, due to poor rig utilisation. No dividends were announced, as expected.

Rig utilisation plummeted. FY20 loss is a turnaround from profit of RM32m in FY19, mainly due to the steep drop in rig utilisation to 66% from 80%, YoY. The results were also further exacerbated by its oilfield services segment turning to losses. Sequentially, 4QFY20 core net loss of RM46.9m widened QoQ from RM6.6m in 3QFY20, similarly due to the poorer rig utilisation of 50% versus 60% last quarter.

Weaker utilisation for 2021 expected. Moving ahead, we expect 2021 to be another challenging year, with VELESTO potentially seeing lower rig utilisation as compared to 2020. Based on the latest Petronas Activity Outlook, local demand for jack-up rigs is expected to remain largely flattish in 2021 from 2HFY20 (2021 of 10 rigs, versus 2HFY20 of 9 rigs). To recap, VELESTO recorded an average rig utilisation of only 55% in 2HFY20. Being the largest jack-up rig provider in Malaysia, we believe the lowered jack-up rig demand would adversely impact VELESTO.

As for the upcoming quarter, based on the company’s rig schedule, we expect 1QFY21 utilisation to be even poorer, with only one rig (i.e. Naga 4, chartered to Mubadala) working throughout most of the quarter. There is a contract at hand for rig Naga 8, but the rig is expected to undergo its Special Periodic Survey (SPS) throughout most of the quarter in preparation ahead of its long-term charter to Carigali-Hess.

Downgrade to UNDERPERFORM, with lowered TP of RM0.11 (from RM0.13 previously), pegged to 0.4x PBV (-2SD from 3-year mean). Post results, we widened our FY21E loss assumption by a further 133%, while introducing new FY22E earnings which are based on rig utilisation assumptions of 60% and 70%, respectively.

The huge impairments in 4QFY20 were the largest recorded in the past three years, leading to a 19% deterioration in the company’s book value YoY. With its outlook still uncertain, we downgrade the stock to UNDERPERFORM.

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 - 25 Mar 2021