We left VELESTO’s analyst briefing with the following key takeaways: (i) Performance in 4QFY23 was boosted by RM17mn non-recurring upside; (ii) Expect high rig utilisation in 1HFY24 but lower in 2HFY24 from scheduled maintenance; and (iii) Higher tax rate moving forward. We trim our FY24- FY26 earnings forecasts by 2.5%-9.7% after factoring in higher tax rate. Maintain Buy with unchanged TP of RM0.33/share based on 12x CY25 EPS.

Performance in 4QFY23 Was Boosted by RM17mn Non-Recurring Upside

Recap that Velesto Energy Berhad (VELESTO) recorded a net profit of RM66.7mn in 4QFY23, an increase of more than 50-fold from 3QFY23. Management alluded that the exceptional performance was supported by RM17mn non-recurring upside, including c.RM10mn reversal of provision for claims for NAGA 7 incident and the excellent operational efficiency of 99% in 4QFY23 (FY23 operational efficiency: 97%). The provisions were made previously to account for any claims that may be incurred after NAGA 7 sank in May 2021. Stripping off the non-recurring and exceptional items, core net profit for the quarter came in at RM49.2mn.

Expect High Rig Utilisation in 1HFY24 But Lower in 2HFY24

Latest rig schedule shows no scheduled maintenance in 1HFY24. However, Naga 2, 3, 5 and 6 are scheduled to undergo special periodic survey (SPS) in 2HFY24. Hence, VELESTO is expected to continue registering core profit comparable to 4QFY23 in the coming two quarters, but earnings in 2HFY24 is expected to be lower in line with the lower utilisation rate. Barring unforeseen circumstances, we expect average utilisation rate to be 88% in 2024. Meanwhile, the jackup drilling rig market is still tight in Malaysia and Southeast Asia, evidenced by rig utilisation that remained at 100%. According to VELESTO, the fixture rate in January 2024 has increased to USD90k-145k per day from USD75k-131k per day in January 2023.

Higher Tax Rate Moving Forward

VELESTO’s effective tax rate in 4QFY23 is at 16.5%, much lower than the statutory tax rate as the group utilises the unutilised tax losses. We understand that these were used up and the group’s effective tax rate should revert to statutory rate moving forward. Management also guided a capex of RM200mn in FY24, with more than half of it planned for SPS for the year.

Impact

We adjust our rig utilisation rate assumption for FY24/FY25/FY26 to 88%/94%/96% (from 89%/90%/90%) in line with management’s rig schedule guidance. We also tweak our average DCR assumption to USD104k/108k/110k per day (from USD100k/110k/111k per day), expecting the average rate to grow more in FY24 and FY25 before slowing down in FY26. Lastly, we raise our tax rate assumption from 15% to 24%. Following these changes, we trim our FY24-FY26 earnings forecasts by 2.5%-9.7%. We also assumed a dividend payout of 20% for FY24-FY26 as management disclosed that the group will have a formal dividend policy moving forward.

Valuation

After rolling forward our base year and changing the valuation methodology to P/E ratio (previously EV/EBITDA), we maintain our Buy recommendation on VELESTO with an unchanged TP of RM0.33/share based on 12x CY25 EPS.

Source: TA Research - 29 Feb 2024