Review

• Velesto Energy Bhd (VELESTO) registered a stellar performance in 4QFY23 where the results exceeded expectations by a wide margin. FY23 core profit of RM100.5mn accounted for 166% of ours and 171% of consensus’ full-year forecasts, respectively. The earnings beat was mainly due to higherthan-expected average daily charter rate (DCR) in 4QFY23.

• The group declared an interim dividend of 0.25 sen/share, the first of such in nearly 10 years.

• QoQ: 4QFY23 core profit surged more than ten times QoQ on the back of higher drilling rig utilisation at 94% (3QFY23: 62%) and higher average DCR at USD99k/day (3QFY23: USD97k/day). Drilling services was the main boost in earnings growth, with PBT surging more than ten times QoQ due to the reasons mentioned above.

• YoY: The group registered core profit of RM66.2mn in 4QFY23 compared with core loss of RM17.8mn in the corresponding quarter last year due to (i) higher average DCR and utilisation rate; (ii) greater progress of i-RDC projects; and (iii) RM11.7mn cost incurred in 4QFY22 due to unanticipated change in work schedule.

• YTD: VELESTO achieved a full-year profit for the first time since FY19. The group registered core profit of RM100.5mn in FY23 from core loss of RM95.5mn in FY22, driven by (i) higher DCR and rig utilisation rate; (ii) higher hydraulic workover unit (HWU) utilisation rate; and (iii) greater progress of i-RDC project.

Impact

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

Outlook

• As jack-up rigs supply remains tight globally, the average DCR in Southeast Asia has continued to trend upwards based on data by S&P Global. VELESTO’s average DCR still has room to increase, with latest average at USD99k/day in 4QFY23, still 36% below c.USD135k/day estimated DCR for the group’s latest project win via Naga 8. With jack-up drilling rigs’ market expected to remain tight in the near to medium term, VELESTO is poised to secure more contracts at higher DCR, hence achieving higher average DCR, optimal utilisation rate and better profitability moving forward.

• VELESTO’s decision to distribute its first dividend of 0.25sen/share (representing c.31% payout ratio) in nearly 10 years suggests that the group is positive on its outlook. We expect VELESTO to continue giving out dividends in FY24 as profitability continues to improve.

Valuation

• Reiterate Buy with an unchanged TP of RM0.33/share pegged to 7.5x CY24 EV/EBITDA.

Source: TA Research - 28 Feb 2024