We expect VELESTO to see a turnaround underpinned by improving utilisation and charter rates outlook. In addition, further impairment is also unlikely. VELESTO being the single largest jack-up drilling rig provider in the country with almost non-existent local competition is well-positioned as the prime proxy for increased drilling activities from Petronas. Clear earnings visibility for the next 1-2 years. BUY with a TP of RM0.35 pegged to 1x PBV on FY20E and is somewhat in line with the local oil and gas sector average.

VELESTO, best known as a jack-up drilling rig provider, is the largest jack-up drilling rig player in Malaysia, operating 7 rigs (named numerically from ‘Naga 2’ to ‘Naga 8’), and services roughly less than half of Petronas’ jack-up drilling rigs requirement. Local competition is almost non-existent, with the only other local competitor being PERISAI, which has only 1 jackup rig, while international players fill up the rest of Petronas’ jack-up rigs demand.

In the latest Petronas activity outlook, the oil major states that it is expected to roughly double its demand for jack-up rigs, from 9-10 units in 2018 to approximately 16-18 in 2019, and 17-19 units in 2020-2021 to increase its brownfield activities. This would make VELESTO the prime beneficiary of Petronas’ increased drilling activity, given its position as the main jackup drilling rig player in Malaysia, although it is still imperative for it to remain competitive to withstand pricing pressures from international players.

Overall, we are expecting VELESTO’s bottom-line to post a turnaround in FY19-20, underpinned by an increase in rig utilisation rates (projected FY19E/FY20E utilisation rate to be at 80%/85%, up from 73% in FY18 and 70% in FY17). This comes after the company managed to secure 1+1-year contracts for four of its rigs back in April 2019 (namely Naga 2, 3, 5 and 6). Meanwhile, charter rates are also expected to stabilise on the back of increased demand, currently hovering slightly above USD70k/day, after bottoming out at USD68k/day in 2017, from a peak of USD151k/day in 2014.

Source: Rakuten Research - 20 Aug 2019