VELESTO’s 1HFY22 results missed expectations due to poor rig utilisation and elevated operating expenses. Petronas has projected flattish demand for jack-up drilling rigs locally over the next two years. Hence, we believe it is crucial for VELESTO to raise its game outside of Malaysia to reduce its dependence on local Petronas jobs. We project wider FY22F and FY23F net losses, by 21% and 13%, respectively, and lower our TP by 20% to RM0.08 (from RM0.10). Maintain UNDERPERFORM. Missed expectations. 1HFY22 core net loss of RM89m already exceeded our full-year net loss forecast of RM63m and the consensus’ of RM11m. The variance against our forecast came largely from poor rig utilisation and elevated operating expenses. 1HFY22 core net loss did narrow by 34% from a year ago thanks to an improved rig utilisation of 40% vs. 33% previously. Also helping, was a lower finance cost (-43%) after it pared down its debts significantly with insurance claims from the Naga 7 rig.

Utilisation outlook to remain sluggish. According to Petronas’ latest activity outlook, the demand for jack-up drilling rigs locally is expected to remain flattish for the next two years. This does not augur well for VELESTO in the local market. We believe it is crucial for VELESTO to raise its game outside of Malaysia to reduce its dependence on local Petronas jobs.

Forecasts. We project wider FY22F and FY23F net losses, by 21% and 13%, as we reflect higher operating expenses and maintain rig utilisation assumptions of 50% and 55% respectively.

Maintain UNDERPERFORM, with a lowered TP of RM0.08 (from RM0.10 previously), as we lowered our valuation to 0.3x PBV (from 0.4x PBV). Our valuation is based on the current average trading valuations of some of its local-centric oil and gas equipment provider peers (e.g. UZMA, PERDANA). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) a strong recovery in demand for oil rigs on sustained elevated oil prices, and (ii) a takeover offer for VELESTO at attractive valuations.

Source: Kenanga Research - 30 Aug 2022