Key takeaways from Velesto Energy Berhad’s (VELESTO) 2QFY23 results briefing: (i) Expect weaker 3QFY23 from lower rig utilisation rate; (ii) Rig supply still tight while daily charter rate stabilising; (iii) VELESTO is targeting long term contracts. We revise our earnings forecasts for FY23/FY24/FY25 by -30.9%/21.9%/49.5% respectively. Following the adjustments in our earnings forecasts, we raise our target price to RM0.26/share (previous: RM0.19/share) pegged to 6.5x CY24 EV/EBITDA. Upgrade to Hold.

Expect Weaker 3QFY23 from Lower Rig Utilisation Rate

With only Naga 5 operating continuously throughout 3QFY23, management guided that rig utilisation rate is expected to fall to c.60% in the quarter. In 3QFY23, Naga 2 will be undergoing repair and maintenance works, Naga 3 will be on a special periodic survey, Naga 8 will undergo underwater inspection inlieu of dry-docking, while Naga 3 and Naga 6 will be on pauses between jobs. Hence, we expect a weaker 3QFY23, which is partially offset by increase in daily charter rate (DCR). Fortunately, rig utilisation rate is expected to recover to above 90% in 4QFY23 as most of the rigs will be occupied with jobs throughout the quarter. We forecast that rig utilisation will be c.83% for FY23.

Rig Supply Tight while Daily Charter Rate Stabilising

Rig market condition is still tight with demand increasing but supply relatively slow on the rise. The tight supply situation is expected to continue if oil price stays above USD80/bbl due to lack of new supply coming into the market. For instance, the rig utilisation in Malaysia (total rigs: 11) and Southeast Asia (SEA) (total rigs: 39) are both at 100%. This has led to significant increase in DCR since 2022. In July 2023, DCR in Malaysia hovered at USD90k-131k per day (Jul 2022: USD58k-88k per day) while DCR in SEA ranges between USD68k-152k per day (Jul 2022: USD58k-120k per day). Since then, DCR has stabilised at current range.

Targeting Long Term Contracts

With DCR stabilising, VELESTO is eyeing for long term contracts (2 years or above) which are mainly located in Thailand and Vietnam. We view this positively as longer-term contracts reduce the pauses between works and provide better earnings visibility for the group. As of July 2023, the group’s orderbook stands at RM1.4bn (firm: RM1.1bn, optional: RM325mn) with earnings visibility up to 1QFY24, while its tender book stands at RM4.2bn.

Impact

We adjust our jack-up fleet utilisation assumptions for FY23/FY24/FY25 to 83%/86%/86% respectively (previous: 86%/86%/88%) in line with VELESTO’s latest rig schedule (Figure 1). We also raise our average DCR assumptions for FY23-FY25 to USD92k-110k per day (previous: USD80k-82k per day). Lastly, we increase our daily operating cash cost assumptions by 7%-10%. Following these, we revise our earnings forecasts for FY23/FY24/FY25 by -30.9%/ 21.9%/49.5% respectively.

Valuation

Following the adjustments in our earnings forecasts, we raise our target price to RM0.26/share (previous: RM0.19/share) pegged to 6.5x CY24 EV/EBITDA. Upgrade to Hold.

Source: TA Research - 1 Sept 2023