Review

• Velesto Energy Bhd’s (VELESTO) 3QFY24 results came in above expectations at 96% of our expectations and 91% of consensus’ full-year forecast. The positive variance is mainly due to higher-than-expected utilisation rate.

• QoQ: 3QFY24’s revenue decreases 10.4% QoQ due to all segments except Integrated Services Segment. We see lower jack-up utilisation (2QFY24: 98%; 3QFY24: 73%), higher average daily charter rate (2QFY24: USD115k; 3QFY24: USD127k) and slightly lower operating efficiency (2QFY24: 99.8%; 3QFY24: 99.1%) in the drilling services. Consequently, PBT fell by 43.4%.

• YoY: Revenue rise 21.8% YoY due to higher jack-up utilisation (3QFY23: 62%; 3QFY24: 73%), higher average DCR (3QFY24: USD97k; 3QFY24: USD127k) and maintained high operating efficiency of 99%. Consequently, PBT rose from RM3.1mn to RM48.8mn.

Impact

• We have raised our FY24 earnings forecast by 24.4% to account for the stronger-than-expected performance in 3QFY24. However, reflecting the suspension of Naga 8 and an anticipated challenging outlook, we have lowered our FY25 and FY26 forecasts by 41.0% and 58.0%, respectively, after revising down utilization rates by 2-5 percentage points and DCR by 4-9%.

Outlook

• Velesto’s market intelligence indicates that Southeast Asia’s jack-up rig demand is expected to decline in 2025 before rebounding in 2026. In Malaysia, demand is projected to decrease from approximately 10 fleets to 6 fleets. Meanwhile, the global jack-up rig market utilisation rate has peaked at 93% and is forecasted to taper to 86% by end-2026. DCR are also anticipated to decline due to market oversupply, although the downturn is not expected to be as severe as the 2016/2017 cycle when oil prices fell below USD50/barrel.

• Last Friday, Velesto received a suspension notice for the Naga 8 jack-up rig contract from Carigali Hess Operating Company Sdn Bhd, effective February 10, 2025, or upon completion of contract demobilisation— whichever comes later—due to the early conclusion of the client’s drilling programme. Separately, Naga 3 remains stationed in Vietnam due to adverse weather conditions but will be towed back to Labuan for SPS. Naga 5 is expected to experience prolonged idleness in 2025, as contract negotiations are ongoing.

• Given these developments, we expect Velesto’s utilisation rate to face further pressure in 2025 unless new contracts are secured for Naga 8. Velesto plans to leverage this downtime to accelerate SPS for Naga 8, positioning all rigs to be SPS-free until 2027 post-1QFY25. This readiness enables Velesto to capture potential opportunities should the market rebound.

• Velesto’s current order book stands at RM876mn, comprising fully firm contracts with clients including PCSB, TLJOC, Carigali Hess, and ExxonMobil.

Valuation

• Corresponding to our change of earnings, we have revised our TP downward to RM0.17/share (previously RM0.30/share) pegged to 12x CY25 EPS. Downgrade from Buy to Hold.

• While near-term challenges, including the suspension of Naga 8 and the weaker utilisation outlook, weigh on the stock’s prospects, we believe the successful securing of new contracts would serve as a key catalyst for a rerating, potentially driving a revaluation of the stock in anticipation of improved earnings visibility

Source: TA Research - 2 Dec 2024