YoY, VELESTO's 9MFY24 revenue surged 27%, driven by improved rig utilisation rates (88% vs. 80%) and higher daily charter rates (DCR) (USD116,000/day vs. USD92,000/day). Core profit tripled due to slower growth in fixed overheads and lower finance costs.

QoQ, 3QFY24 revenue declined 10%, impacted by reduced rig utilisation (73% vs. 98% in 2QFY24) as Naga 2 and Naga 6 underwent special periodic surveys (SPS). The decline was partially mitigated by stronger DCRs of USD127,000/day (vs. USD115,000/day in 2QFY24).

This resulted in a profit drop of 32% QoQ.

Outlook. In 4QFY24, rig utilisation is expected to improve, with 5 out of 6 rigs on charter, as only Naga 5 enters SPS. However, Carigali Hess has notified that Naga 8's charter will end in February 2025, earlier than the previously expected 4QFY25, due to the faster-than-expected completion of its drilling programme. Consequently, rig utilisation in FY25F is projected to be weaker than earlier estimates. On top of Naga 8, the group also needs to look for drilling jobs for Naga 3 and Naga 5.

Forecasts. We raise FY24F earnings by 25% after assuming a higher rig utilisation (84% to 87%) with DCR assumption unchanged at USD121,333/day. On the other hand, we cut FY25F earnings by 14% after reducing rig utilisation assumption to 78% (from 84%) due to higher possible rig idle time (Naga 3,5 and 8) as it looks to secure new drilling jobs for the rigs in 2025.

Valuations. Correspondingly, we cut TP by 30% to RM0.21 (from RM0.30) after reducing our target FY25F PER to 12x (from 15x) as its earnings appear to be peaking in FY24F and subsequently weaker in FY25F, which no longer justify a peak cycle PER. Our target PER remains at a slight premium compared to its peer SEADRILL (11x) as it remains the preferred drilling contractor choice for Petronas.

Nevertheless, we believe it is still justified given that it is at -0.5 SD of its 2-year mean. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 4).

Investment case. We like VELESTO due to: (i) the positive outlook of the local and regional jack-up rig market buoyed by strong demand; (ii) its strengthened bargaining power as a result of it being the only major drilling player in Malaysia and (iii) consistent reduction in gearing.

Maintain OUTPERFORM.

Risks to our call include: (i) a sharp plunge in crude oil prices, (ii) worse-than-expected capex deferral by Petronas, and (ii) longer-than- expected maintenance duration for rigs.

Source: Kenanga Research - 2 Dec 2024