VELESTO's FY23 results beat expectations due to higher rig utilisation rate and slower cost increase. Its average daily charter rate (DCR) rose during FY23 and we expect further upside in FY24 as its rigs undergo renewals. We raise our FY24F earnings forecast by 4%, lift our TP by 20% to RM0.31 (from RM0.26) and upgrade our call to OUTPERFORM from MARKET PERFORM.

Its FY23 core net profit of RM100.3m beat our forecast and the consensus estimate by >100% and 69%, respectively. The variance against our forecast came largely from higher-than-expected rig fleet utilisation rate and contained operating costs.

YoY, its FY23 top line more than doubled due to an improvement in rig utilization rate from 62% to 83% and an increase in the average DCR from USD77,000 to USD94,000. This more than covered higher operating, depreciation and finance costs, resulting in a turnaround.

QoQ, its 4QFY23 top line grew 24% largely attributable to a significant improvement in rig utilisation, which rose to 94% from 60%, on a stable average DCR. Its core net profit surged 17-fold as operating expenses were well contained.

Outlook. Currently, all six of the company's rigs are in use, but five are scheduled to conclude their current charters in 1HFY24. This scenario presents an opportunity for the company to secure new charters, potentially at higher DCR, considering the strong market demand for jack-up rigs. Also helping, is stabilising labour cost.

Forecasts. We raise our F24F net profit forecast by 4% after adjusting for slightly lower growth rate in operating costs. We keep our FY24F average DCR and utilisation assumptions of USD119,000 and 84%, respectively. Our FY25F forecasts assume an average DCR of USD122,500 and utilisation of 87%.

Valuations. Correspondingly, we raise our TP by 20% to RM0.31 (from RM0.26) after rolling forward to 15x FY25 PER, at a slight premium to valuations of regional drilling peers (PETROVIETNAM: 14x). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 4).

Investment case. We like VELESTO due to: (i) the positive outlook of the local jack-up rig market buoyed by strong demand amidst firm crude oil prices; (ii) its strengthened bargaining power as a result, paving the way for better DCR on contract renewals, and (iii) potential upside surprises to its margins on early signs of easing in labour cost inflation.

Upgrade to OUTPERFORM from MARKET PERFORM.

Risks to our call include: (i) a sharp plunge in crude oil prices; (ii) lower-than-expected DCR on rig contract renewals; and (ii) longer-than- expected maintenance duration for rigs.

Source: Kenanga Research - 28 Feb 2024