Velesto Energy Bhd
(May 23, 27 sen)
Maintain buy with an unchanged target price (TP) of 40 sen: Velesto Energy’s first quarter of financial year 2019 (1QFY19) loss was no surprise, with rig utilisation at 66%, which was close to what we had earlier anticipated. Notwithstanding, we believe our previous margin assumption was likely too conservative, prompting us to raise our FY19 earnings per share.

 
Velesto’s 1QFY19 core loss of RM22.7 million is deemed to be in line with consensus but ahead of our forecast, in anticipation of a stronger second half of FY19 (2HFY19) performance. Operationally, 1QFY19 revenue grew 4.3% year-on-year (y-o-y) to RM127 million driven by a slight improvement in drilling rig utilisation (66% versus 65% in 1QFY18) and higher daily charter rates, but offset with a weaker oilfield services segment following cessation of the Labuan operation. Revenue was also supported by a favourable US dollar which appreciated by 4% y-o-y. The higher RM6 million loss was mainly attributed to higher depreciation charges and lower interest income.

Revenue fell by 33% quarter-on-quarter (q-o-q), resulting in a net loss of RM22.7 million. This was affected by a lower rig utilisation rate, which fell to 66% from 91% in 4QFY18, primarily due to three idle rigs that were in Malaysia Marine and Heavy Engineering Holdings Bhd’s fabrication yard with Naga 5 and 6, both for special periodical survey work, while Naga 2 underwent leg repair work.

We raised our FY19 earnings by RM6 million, as we imputed in a higher margin assumption on greater cost savings. We remain positive on Velesto on the back of recovering drilling rig prospects with Petronas jack-up rig demand expected to increase to 16-18 rigs in 2019 (from 7-10 in 2018). In addition, we believe Velesto, as Malaysia’s largest jack-up operator with a younger fleet than others, has an edge over its competitors in terms of securing new contracts. — Affin Hwang Capital Research, May 23