Review

• Velesto Energy Bhd’s (VELESTO) 1HFY23 core earnings of RM30.6mn (1HFY22: core loss of RM86.3mn) missed expectations at 35% of ours and consensus’ full-year forecasts. The negative variance was mainly attributed to higher-than-expected operating expenses and finance costs.

• QoQ: 2QFY23 revenue dropped 2.8% QoQ due to lower progress in the Integrated Rig Drilling Completion (i-RDC) services. However, PBT soared 46.7% QoQ on the back higher average daily charter rate (DCR) (2QFY23: USD94k/day, 1QFY23: USD86k/day) for jack-up rigs.

• YoY: Revenue for the quarter more than tripled YoY supported by: (i) higher utilisation rate (2QFY23: 88%, 2QFY22: 41%) and average DCR (2QFY23: USD94k/day, 2QFY22: USD75k/day) for jack-up rigs, (ii) higher utilisation of hydraulic workover units, and (iii) greater progress of i-RDC services. Consequently, the group turned from LBT of RM41.8mn to PBT of RM22.7mn in 2QFY23.

• 1HFY23: The group registered a PBT of RM38.2mn (1HFY22: LBT of RM87.6mn) on the back of: (i) higher utilisation rate (1HFY23: 89%, 1HFY22: 40%) and average DCR (1HFY23: USD90k/day, 1HFY22: USD75k/day) for jack-up rigs, (ii) higher utilisation of hydraulic workover units, and (iii) greater progress of i-RDC services.

Impact

• No change to our earnings forecasts pending granularity from the analyst briefing later today.

Outlook

• With the benchmark Brent crude oil expected to remain above USD80/bbl until the end of 2023, we expect to see more capex spending by major oil producers moving forward. This, coupled with heightened competition for jack-up rigs globally should provide favourable upside to the average DCR. Note that the jack-up rigs’ utilisation rate in Southeast Asia remains at 100%.

• Nonetheless, we expect earnings to be lower QoQ in the coming quarter mainly dragged by lower utilisation rate as some of the jack-up rigs are expected to undergo special periodic survey (SPS) or underwater inspection in lieu of drydocking (UWILD) throughout most of 3QFY23.

Valuation

• We roll forward our base year to CY24. Maintain Sell with a higher TP of RM0.22/share (previous: RM0.19/share) pegged to 6.5x CY24 EV/EBITDA.

Source: TA Research - 30 Aug 2023