1HFY21 core net loss came in below expectations, dragged by poorer rig utilisations coupled with higher opex. While outlook for the local rig market remains weak, we believe the sinking of Naga 7 could be a blessing in disguise. The amounts to be received from the insurance claims could potentially halve its borrowings and bring its net gearing down to 0.1x (from 0.4x currently), while a nimbler fleet could also translate to better rig utilisations, especially in the current tough times. Maintain UP and TP of RM0.13.

1HFY21 results deemed to have missed expectations. VELESTO reported core 1HFY21 losses of RM131m, arrived after adjusting for: (i) losses from asset written off of RM461m – this refers to the write-off of its Naga 7 rig after it submerged in the sea back in early May, (ii) insurance claims amounting to ~RM552m (reported as “other operating income” line in the income statement), in relation to the Naga 7 incident, and (iii) forex. Overall, the 1HFY21 core net loss is deemed to have missed expectations, as it overshot our and consensus full-year loss forecasts of RM69m and RM60m, respectively, dragged by poorer-than- expected rig utilisation coupled with higher-than-expected opex. Meanwhile, no dividends were announced, as expected.

Widening losses. 2QFY21 core net loss came in at RM75m, representing a widening of losses by 34% QoQ. While the quarter enjoyed higher rig utilisation (38% vs 28%), bottom-line was severely dragged by high opex – presumably arising from the Naga 7 incident. YoY, 2QFY21 losses widened >9x YoY, in tandem with the poorer rig utilisation (38% vs 67%), coupled with the aforementioned higher opex. Cumulatively, 1HFY21 plunged into losses YoY, dragged by poorer rig utilisation (33% vs 76%) coupled with the aforementioned higher opex recognised in 2QFY21.

Utilisation outlook remains weak; sinking of Naga 7 could be a blessing in disguise. In line with Petronas’ activity outlook, local demand for jack-up rig is still expected to remain weak in the coming 1- 2 years. Nonetheless, given the thinning of its fleet follow Naga 7’s demise, coupled with some upcoming short-term jobs, we believe upcoming quarters could see higher rig utilisation numbers. Overall, the sinking of Naga 7 could prove to be a blessing in disguise. With the incoming influx of cash from the insurance claims, the money could be used to pare down almost half of its borrowings – potentially lowering its net gearing to 0.1x from 0.4x currently. This could give the company the much-needed headroom to ride through the current tough market conditions while awaiting a recovery. Additionally, a smaller fleet would also ensure higher utilisation rates, especially considering current difficult market conditions.

Maintain UNDERPERFORM. Post results, we widened our FY21E losses by a further 24%, as we lowered our rig utilisation assumption. However, our FY22E losses are narrowed 44% upon lowered finance costs, based on the assumption of it utilising the insurance claims mostly for debt repayments. Overall, our FY21E/FY22E numbers are based on a rig utilisation assumption of 50%/65%. That said, given its anticipated improved balance sheet, we raised our ascribed valuations to 0.5x PBV (from 0.4x previously) – in-line with the stock’s twelve- month mean, arriving to a higher TP of RM0.13 (from RM0.11 previously).

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 2021