We left VELESTO’s analyst briefing with the following key takeaways: (i) Better utilisation rate from Naga 3 with higher DCR from Naga 3 and 5; (ii) Lower overall utilisation rate to be seen in 2HFY24 & FY25; and (iii) Higher operational efficiency for Drilling Services. With the adjustment for lower overall utilization rates but higher day rates and improved operational efficiency, we adjust our earnings for FY24/FY25/FY26 by +4.3%/- 11.7%/+24.1%. We revised our TP slightly to RM0.30/share (previously RM0.34/share) based on 12x CY25 EPS. Maintain Buy.

Better Utilisation Rate From Naga 3 With Higher DCR for Naga 3 and 5

Recap that Velesto has secured a letter of award for Naga 3 from Thang Long Joint Operating Co., with the rig scheduled to operate in Vietnam from September to November 2024. Management has confirmed that this contract features a higher day rate, which is expected to positively impact revenue. This deployment will also optimize Naga 3’s utilization before its Special Periodical Survey (SPS) in 1QFY25. In Q2FY24, the i-RDC project made notable progress, completing 14 wells.

Management has indicated that Naga 5 will transition from milestone-based contracting to day rates starting in Q3, offering a more stable income stream compared to the previous variable profit structure. Although overall revenue is anticipated to decrease, this decline will be mitigated by the higher and more stable day rates. The order book for Integrated Project Management has decreased to RM101mn from RM189mn, but the shift to day rates provides greater revenue stability. As a result of these developments, we have revised our day rate forecasts from USD118.0/127.8/127.8 to USD119.6/128.2/128.2 for FY24/FY25/FY26, respectively.

Lower Overall Utilisation Rate to be Seen in 2HFY24 & FY25

Despite Naga 3’s contributing higher utilisation rate, Velesto’s overall utilization rate is projected to decline in 2HFY24 due to the scheduled SPS for Naga 5 and Naga 6. Management has indicated a utilization rate forecast of 60- 70% for the second half, accounting for this downtime. Despite the reduced utilization, management has assured that the company remains confident in maintaining profitability during this period. Looking ahead to FY25, both Naga 3 and Naga 8 are scheduled for SPS, while the company is actively bidding for new contracts for Naga 3 and Naga 5. Management has indicated that Naga 5 will experience some additional idle time, as they focus on securing a strategic, long-term contract (approximately 2 years) to enhance future revenue visibility. This strategy positions Velesto for a stronger outlook in FY26 and FY27, with management optimistic about locking in this long-term contract. As a result, we have revised our utilization rate forecasts for FY24/25/26 to 82.6%/90.3%/97.2% from the previous estimates of 87.5%/94.4%/95.8%.

Higher Operational Efficiency for Drilling Services

Velesto’s operational efficiency was notably enhanced by the expedited completion of the Naga 2 SPS, which was finished in just two months instead of the expected three. Management’s commitment to maintaining high operating efficiency is evident in the company’s strong performance, with operational efficiency rates of 99.3% for 1H24 and 99.8% for 2QFY24. These results reflect effective performance during active operations. Given this consistent operational excellence since 3QFY22 and the latest figures, we have revised our operational efficiency forecasts to 98.7%/98.0%/98.0% for FY24/FY25/FY26, up from our previous estimate of 95% for each year.

Impact

Previously, we have already taken into account the lower utilisation rate in our FY24 forecast. With the slight adjustment for lower utilization rates but higher day rates and improved operational efficiency mentioned above, we adjust our earnings for FY24/FY25/FY26 by +4.3%/-11.7%/+24.1%.

Valuation

Corresponding to our change in earnings, we revised our TP slightly to RM0.30/share (previously RM0.34/share) based on 12x CY25 EPS and an ESG premium of 3%. Maintain Buy.

Source: TA Research - 2 Sept 2024