VELESTO: Buy the dip

Buy the dip. Following the news of Saudi Aramco suspending JU rig contracts with multiple drilling contractors, potentially leading to an increase in JU rigs supply to the SEA region, VELESTO's share price experienced a -11% sell-off, dropping from its recent high of RM0.315 to the last trading day's RM0.28. Following the decline, we believe that the risk-reward profile turned attractive, particularly considering its strong earnings trajectory projected for FY24f and FY25f. Although the potential increase in JU rigs supply to SEA might limit the upside of DCRs in the region, we anticipate the robust DCRs to sustain over the near term, as global national oil companies continue to maintain robust capex budgets amidst buoyant oil prices. Additionally, VELESTO has already secured contracts for up to 80% of its capacity for FY24f and 62% for FY25f. HLIB currently has a BUY call with a TP of RM0.35, indicating a 25% potential upside. Notably, consensus TP for VELESTO ranges from RM0.29 to RM0.35, with some even factoring in the negative ramifications of the Saudi Aramco event into their forecast.

Strong earnings anticipated in FY24 and FY25. We anticipate VELESTO's earnings for FY24f and FY25f to rise by 89.5% and 10.3%, respectively, driven by the heightened DCRs and utilisation rate. The global drilling market is currently experiencing an upward cycle due to a crunch in drilling rigs, resulting in robust utilization rates and strong bargaining power for rig owners in pricing their DCRs. With the global rig market nearing full utilization (>90%), contracted rigs have been increasing in recent quarters while supply has decreased due to rising demand for drilling activities. This crunch is particularly severe in the SEA region, where all available rigs have been fully utilized as of November 2023, with DCRs reaching as high as USD145-165k, representing a YoY increase of 40-60%. Based on guidance from VELESTO’s rigs schedule, we understand that the higher DCRs secured from Petronas will contribute meaningfully to VELESTO from 3Q24 onwards.

Buy the dip. The formation of a hammer candle pattern, along with strong support anticipated at RM0.260-0.270, suggests VELESTO is poised for a rebound. A successful breakout above RM0.28 (MA 20) will spur the price further toward RM0.295-0.315-0.330 levels. Cut loss at RM0.245.

Collection range: RM0.270-0.275-0.280

Upside targets: RM0.295-0.315-0.330

Cut loss: RM0.245

Source: Hong Leong Investment Bank Research - 12 Apr 2024