Velesto Energy - Runaway Labour Cost Still a Concern

Date: 
2023-12-01
Firm: 
KENANGA
Stock: 
Price Target: 
0.17
Price Call: 
SELL
Last Price: 
0.275
Upside/Downside: 
-0.105 (38.18%)

VELESTO guided for higher rig utilisation in the upcoming quarter. Spot jack-up rig rates have risen significantly in the region, which VELESTO is unable to capitalise on as its entire fleet has been chartered out at lower rates (except for Naga 8). Runaway labour cost will spill over to CY24. We maintain our forecasts, TP of RM0.17 and UNDERPERFORM call.

We came away from VELESTO’s post-results briefing feeling cautious of its near-term prospects. The key takeaways are as follows:

1. Rig utilisation will improve in the coming quarter. The company expects an uptick in rig utilization for the upcoming quarter. In 3QFY23, rig utilization was low as Naga 3 was idle. It had since Oct 2023 been contracted by Petronas Carigali. Coupled with the Special Periodical Survey (SPS) for Naga 4 being completed in Sep 2023, we believe its 4QFY23 rig utilisation should hit 90% or higher, contingent upon rougher weather conditions at the end of the year.

2. Jack-up rates are still on the rise. Regional jack-up daily charter rates (DCR) have risen 38% YoY to USD165,000, driven by rising rig demand. However, VELESTO is unable to capitalise on it as its entire fleet has been chartered out at lower rates (at USD100,000 or below), except for Naga 8 which contract has recently been renewed. VELESTO will only be able to fully ride on the higher rates upon contract renewals from 2QFY24 onwards.

3. Labour cost is still on an uptrend. VELESTO believes labour cost will continue to rise in FY24 driven by a tight supply of offshore crew. This will exert more pressure on the group's operating cost, negating the positive impact from higher DCRs in near future. It guided for minimal expansion in its drilling division’s EBITDA margin in FY24F.

Forecasts. Maintained.

Correspondingly, we maintain our TP at RM0.17 based on 15x FY24F PER, at a slight premium to valuations of regional drilling peers (PETROVIETNAM: 14x) due to VELESTO’s supportive client, Petronas. There is no adjustment to our TP based on ESG, which has been given a 3-star rating as appraised by us (see page 4).

We prefer to avoid VELESTO at this juncture due to: (i) margin compression from the inflationary cost environment, (ii) several contracts set to conclude in FY24, indicating increased downtime in rigs, and (iii) the inability to benefit from the regional DCR of USD130,000-USD140,000, as the majority of its rigs have been contracted out at lower DCRs. Maintain UNDERPERFORM.

Risks to our call include: (i) fleet expansion via the acquisition of new jack-up rigs, and (ii) higher DCRs should the jack-up market tightens further.

Source: Kenanga Research - 1 Dec 2023

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