1QFY21 hugely missed expectations yet again, largely dragged by poor rig utilisation of merely 28% during the quarter. Moving forward, we believe FY21-22 will continue to be a challenging period for VELESTO, given sluggish local demand for jack-up rigs. Maintain UP with TP of RM0.11.

1QFY21 hugely missed expectations. 1QFY21 recorded core net loss of RM55.9m, hugely missing expectations coming in beyond our full- year loss forecast of RM28.4m, and consensus of RM35.7m, due to poor rig utilisation coupled with weaker-than-expected margins. No dividends were announced, as expected.

Low rig utilisation. YoY, 1QFY21 plunged into losses, from a core net profit of RM20.4m in 1QFY20, as rig utilisation deteriorated to 28%, from 84% last year. QoQ, core loss widened a further 19% as rig utilisation came in poorer at 28% versus 50% last quarter.

Expecting weak rig utilisations. In tandem with Petronas’ Activity Outlook, we believe the demand for local jack-up rigs will remain weak in the coming 1-2 years. Being the largest jack-up rig provider in Malaysia, this will undoubtedly adversely impact VELESTO.

Meanwhile, for its Naga 7 rig which remains submerged off the coast of Sarawak since the incident in 3 May 2021, VELESTO had on 31 May 2021 issued a notice of abandonment on the submerged rig and is currently awaiting a response from the insurance underwriters. As per our understanding, the sum insured should be more than adequate to cover the book value of the rig. In a worst-case scenario where VELESTO is forced to write off the rig completely without any compensation, we believe we may see a potential write-down value of ~USD100m to the group’s books (or roughly ~20% of the group’s book value).

Reiterate UNDERPERFORM, with unchanged TP of RM0.11, pegged to 0.4x PBV at roughly -2SD from its 3-year mean.

Post results, we more than doubled our FY21E loss assumptions, while reversing FY22E earnings to a loss of RM28.4m (versus previous profit forecast of RM16.4m), based on a lowered rig utilisation assumption of 50%/60% for FY21/FY22 (versus previous assumptions of 60%/70%).

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 - 1 Jun 2021