4QFY21 results slightly beat our expectations, thanks to improved rig utilisation during the quarter. Nonetheless, in accordance with Petronas’ latest activity outlook, local demand for jack-up rigs is expected to remain flattish for the next two years. This means that VELESTO will likely be mired in the red for the time being, unless it improves its competitiveness and secure jobs overseas to reduce reliance on Petronas. Maintain UP and TP of RM0.10.

FY21 marginally above our expectations. FY21 core net loss of RM172m came in slightly above expectation, making up only 93% of our loss estimates, due to the slightly better-than-expected utilisation, especially in 4QFY21, coupled with the better-than-expected operating margins. However, results were within street’s estimates at 104% of consensus loss estimates. No dividend was announced, as expected.

4QFY21 managed to turn profitable. FY21 losses widened YoY largely due to poorer rig utilisation of 48% versus 66% last year. However, the 4QFY21 managed to turn into the black with a net profit of RM7m, largely thanks to better rig utilisation of 78% (versus 51% in 3QFY21 and 50% in 4QFY20).

Utilisation outlook to remain sluggish. According to Petronas’ latest activity outlook, demand for local jack-up drilling rigs is expected to remain flattish for the next two years. This means that VELESTO would likely still remain in the red for the time being, unless it manages to improve its competitiveness and secure jobs overseas to reduce its reliance on Petronas.

Maintain UNDERPERFORM, with an unchanged TP of RM0.10, pegged to 0.4x PBV – roughly around -1SD below its mean valuations. Post results, we lowered our FY22E loss estimates by 13% as we tweaked our operating margins assumptions. This also takes into consideration its trimmed down fleet size following the sinking of Naga 7 earlier in the year. We also introduce new FY23E numbers. Our model is based on a rig utilisation assumption of 50%/55% for FY22E/FY23E.

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 Mar 2022