• FY23 core net profit of RM99.5m was above our RM56.3m forecast, as the JU rig utilisation and DCR in 4Q23 were higher than expected.

• Velesto also made faster progress on its i-RDC contract in 4Q23. Reiterate Add as Velesto’s rig utilisation and DCR will improve further in 1Q24F.

• We raise our core EPS forecasts as we trim opex provisions, and raise our DCF-based TP to 31 sen (unchanged Ke of 11.2%).

4Q23 core profit almost triple what we had expected

Before yesterday, we had expected Velesto to deliver a sequentially-stronger 4Q23 core net profit of RM23.5m compared to 3Q23’s core net profit of only RM1.2m. But Velesto actually delivered 4Q23 core net profit of RM66.7m, almost triple what we forecasted. The positive variance was caused by higher-than-expected JU rig utilisation of 94% in 4Q23 (vs. our bottom-up estimate of 92%), an average DCR of US$99k/day in 4Q23 (vs. the US$95k/day that we had estimated), and a pretax profit of RM12.6m for the i-RDC contract in 4Q23 (compared to merely breakeven for 9M23 and for our full -year forecast) due to greater work progress and revenue recognition for the i -RDC.

Drilling opex fell qoq in 4Q23 despite greater work volumes

Additionally, we estimate that Velesto’s absolute drilling opex fell qoq from 3Q23’s RM151m to 4Q23’s RM140m, even though average JU utilisation rose from 3Q23’s 62% to 4Q23’s 94%. The higher qoq revenues and lower qoq opex led to an eye-watering drilling EBIT margin of 40% in 4Q23, vs. a mere 10% in 3Q23. The aforementioned 40% EBIT margin was even higher than the 30% EBIT margin that Velesto achieved in the heydays of 2013-2014. Clarification from Velesto may help us establish whether such a counter- intuitive trend can be repeated going forward , or if this is a once-off phenomenon. On a full-year basis, Velesto delivered a RM100m core net profit for FY23, vs. a core net loss of RM100m in FY22, as a result of a 21% pts rise in utilisation to 83% and a 25% rise in average DCR to US$94k/day. Velesto also declared a DPS of 0.25 sen, 20.6% payout.

A busy and rewarding FY24F beckons Velesto

The upcycle in global upstream capex began in 2022 and accelerated in 2023, causing JU utilisation and DCRs to rise to high levels (see our 8 Feb 2024 report for more details). Our DCF valuation model for Velesto assumes that the global offshore capex spending will continue in 2024-2025F, before moderating from 2026F onwards. Reiterate Add with the key rerating catalyst for Velesto being the disclosure and guidance for the DCRs that it had secured for the new 2-year umbrella contract with Petronas Carigali (unlisted) which took effect on 7 Feb 2024. Velesto said it targeted a US$125k/day to US$135k/day rate, vs. 2023’s US$105k/day, and we have pencilled-in the midpoint of US$130k/day. Also, we have pencilled-in a utilisation rate of 80% for FY24F, but Velesto could deliver at the higher end of its guidance of 80-85%. Downside risks include a material decline in oil prices, and the strategic reduction in offshore capex spending (such as that announced by the Saudi government last month) that could impact Velesto’s future prospects for earnings growth .

Source: CGS-CIMB Research - 28 Feb 2024