VELESTO has secured a charter contract for its Naga 4 drilling rig, worth USD30m commencing 2QCY20. We are positive on the new win from the continuing uptick in rig demand for Malaysian waters. Post-contract award, all of VELESTO’s rigs would have contracts at hand throughout 2020. BUY with TP of RM0.43 pegged to 1.2x PBV. We like VELESTO as a proxy for the drilling rig space in Malaysia and being the largest and only listed jack-up drilling provider in the country. VELESTO’s turnaround story seems positive with clear earnings visibility for the next 1-2 years.

VELESTO announced that it has received a letter of award from Mubadala Petroleum for the provision of jack-up drilling rig unit and services for the Pegaga Development Drilling Campaign, with an estimated contract value of USD30m. The contract is to drill 7 firm wells with commencement in 2QCY20. VELESTO will use its Naga 4 drilling rig to undertake the works.

While no contract tenure was officially disclosed in the announcement, based on the job scope, we believe the contract would roughly take 12 months to complete. Assuming ~10% of the contract value are for add-ons (e.g. mobilisation and other reimbursable costs), the contract value would imply charter rates of ~USD75k per day, which is in-line with current market rates for premium rigs. We expect the contract to fetch roughly ~45% EBITDA margin, contributing to ~16% of our FY20E EBITDA.

We are positive on the contract award as it not only signifies VELESTO’s ability of continued contract wins, but also sustained uptick in drilling rig demand for Malaysian waters. The contract win also means that all 7 of VELESTO’s drilling rigs would be utilised throughout most of 2020, assuming contract extensions for Petronas Carigali charted rigs (Naga 2, 3, 5 and 6).

No changes to our FY19-20 forecasts, as the contract win have already been imputed into our assumptions. Our FY19E/FY20E numbers are derived based on the assumptions of (i) 80%/90% rig utilisation, and (ii) average daily charter rates of USD72k/USD75k, respectively.

Source: Rakuten Research - 12 Dec 2019