VELESTO has secured an extension for its Naga 8 jack-up rig for 18 months at a daily charter rate (DCR) of USD135,000. We are positive on this development, which we have already reflected in our forecasts. The rest of its fleet still has contracts running until 1HFY24 with a DCR averaging at c.USD90,000. We maintain our forecasts, TP of RM0.19 and UNDERPERFORM call.

VELESTO has secured an extension for its Naga 8 jack-up rig from Carigali Hess Operating Company Sdn Bhd, for 18 months, commencing from 19 Apr 2024 until 18 Oct 2025, subject to any extension mutually agreed upon. The value of the extension is estimated at USD74m or a DCR of USD135,000.

Deemed within expectation. We are positive on the development, which we have already reflected in our forecasts. The rest of its rigs have mostly been chartered out at a DCR of USD90,000 until 1HFY24. With this Naga 8 extension, it would bring the average DCR to USD100,000 (for the whole fleet), which is consistent with our FY24 assumption.

Nevertheless, the latest win indicates that the local jack-up rig market is booming and if this sustains into 2HFY24, the group might be able to renew charters on the rest of the fleet at higher rates.

Forecasts. Maintained

We maintain our TP of RM0.19 based on 15x FY24F PER. This is at a slight premium to valuation of regional drilling peers (such as PETROVIETNAM: 14x) due to Velesto’s supportive client Petronas. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 4).

We remain cautious on VELESTO due to: (i) possible earnings derating due to drag from lower fleet utilization in 3QFY23, (ii) persistent high costs may compress its margins, and (iii) higher financing costs on elevated interest rates. Maintain UNDERPERFORM.

Risks to our call include: (i) fleet expansion via acquisition of new jack-up rigs, (ii) a further surge in DCR as jack-up market tightens, and (iii) a reduction in opex.

Source: Kenanga Research - 28 Nov 2023