Global jack-up rig marketed utilisation (i.e. rigs that already have contracts on-hand, and hence are off-market) has now reached as high as 91%, steadily recovering from a low of 70% in 2017. Riding on this trend, we believe VELESTO’s current healthy rig utilisation is expected to last at least until end-2023. We maintain our forecasts, TP of RM0.16 and OUTPERFORM call.

3QFY22 analyst briefing. We attended VELESTO’s post 3QFY22 results analyst briefing. To recap, 3QFY22 managed a successful turnaround into a core profit of RM8.6m (from core loss of RM42.6m in 2QFY22, and core loss of RM47.8m in 3QFY22), amidst higher jack-up rig utilisation of 78% (versus 41% in 2QFY22, and 51% in 3QFY21).

Below are some of our key takeaways from the briefing:

1. Jack-up drilling rig market remains strong. Global demand for jack-up drilling rigs is still on a rise, underpinned by the recovery in activity levels for exploration and developments within the oil and gas industry. Global jack-up rig marketed utilisation (i.e. rigs that already have contracts on-hand, and hence are off-market) has now reached as high as 91%, steadily recovering from a low of 70% in 2017.

2. Rig utilisation to remain promising for VELESTO. Trickling down to VELESTO, the recovery in the global market is also benefitting VELESTO, which solely operates within local waters. Based on the group’s rig schedule, we believe the current high rig utilisation rates should maintain at least until end-2023, thus implying further profitable quarters to come.

Overall, we came away from the briefing feeling mostly positive, reiterating our view on VELESTO being a prime beneficiary of the resurgence of the drilling market.

Forecasts. Unchanged.

Maintain OUTPERFORM, with unchanged TP of RM0.16 – pegged to 15x PER, in-line with the ascribed valuations for other local-centric equipment and service providers within our coverage universe (e.g. DAYANG). There is no adjustment to our TP based on ESG given a 3- star rating (see page 4).

Overall, we like VELESTO for: (i) being a prime beneficiary of the recovery of the local drilling jack-up rig market, being the largest jack-up provider in the country, (ii) sustainability of its earnings turnaround story.

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 - 1 Dec 2022