We see the regional and local jack-up rig market improving, with marketed utilisation reaching a high of 91% in Southeast Asia and 100% in Malaysia. We believe this offers further upside to VELESTO’s current rig utilisation and charter rates. Hence, we may start to see VELESTO turning around as soon as 2HFY22. Upgrade to OUTPERFORM, with a TP of RM0.16.

Tightening rig supply in the market. Marketed utilisation for global jack-up rigs has seen a sharp recovery in 2022, on the back of the crude oil price rally as we transition to a post pandemic era. While demand for jack-up rigs has slightly fallen over the past two years given the outbreak of the Covid-19 pandemic, the market is now showing signs of a strong turnaround. Throughout the past 7-8 years, supply for the global jack-up rig market has been gradually declining year-on-year, as newbuild activities slowed down coupled with a pick-up in scrapping activities, while demand has been on an uptrend since bottoming out in 2017. (Note that the term “marketed utilisation” differs from operational utilisation – with the former referring to rigs that have already secured contracts at hand, and hence are off the tender market).

Local conditions turning favourable. In-line with the tightening global market, jack-up rigs in Southeast Asia has reached to a high of 91% marketed utilisation – with charter rates going up as high as USD120k/day. Domestically in Malaysia, local jack-up rigs have already reached 100% marketed utilisation – i.e. all readily available rigs in Malaysian waters are already not available for new tenders, with rates going up as high as USD88k/day (versus VELESTO’s current average of USD75k/day).

Turnaround as soon as 2HFY22. All things considered, we believe VELESTO should see a turnaround to profits as soon as the 2HFY22, with an upwards revision in charter rates likely going into 2023. As such, we lowered our FY22F loss assumption by 20%, while forecasting a turnaround to profit of RM87m in FY23F (versus previous loss forecast of RM49m), as we raised both our rig utilisation and charter rates assumptions. Our current forecasts are based on a rig utilisation assumption of 60-80% and day rates of USD75-85k.

Upgrade to OUTPERFORM (from UNDERPERFORM previously), with a higher TP of RM0.16 (from RM0.08 previously). Given the company’s prospects of returning to profitability, we are switching our valuation methodology to 15x PER (from 0.3x PBV previously) – in-line with the valuation of DAYANG, a similarly local-centric oil and gas equipment and services provider within our coverage universe. 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 significant pull-back in oil prices weighing on oil & gas activities, (ii) escalation in operating costs, and (iii) project execution risks.

Source: Kenanga Research - 14 Sept 2022