Velesto remains mired in losses in 1QFY22, dragged by poor rig utilisation rate. Overall, local demand for jack-up rigs is expected to remain flattish for the next two years. As such, we find it crucial for VELESTO to improve its competitiveness and secure jobs overseas in order to reduce reliance on Petronas. Maintain UP and TP of RM0.10.

1QFY22 deemed broadly within expectations. We deem 1QFY22 core net loss of RM44m broadly within expectations (against our full- year loss assumption of RM63m and consensus profit assumption of RM0.5m), expecting contracts to be secured in the remaining quarters of the year that will lift rig utilisation No dividends were announced, as expected.

Still in the red. QoQ, 1QFY22 turned into losses (from core profit of RM7m), dragged by poorer rig utilisation of 39% versus 78% last quarter. YoY, losses narrowed by 22%, in tandem with the improved rig utilisation of 39% versus 28% last year.

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 face challenges for the time being, and as such, we find it crucial for VELESTO to increase its competitiveness and secure contracts overseas in order 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. No changes to our FY22-23E numbers post results, based on a rig utilisation assumption of 50-55%.

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 May 2022