VELESTO anticipates daily charter rate (DCR) renewals for Petronas-related contracts in Mar 2024. It guided for robust rig utilisation in 1HFY24F, with scheduled maintenance kicking in during 2HFY24. Its tender book remains sizeable at RM4.3b. We maintain our forecasts, TP of RM0.31 and OUTPERFORM call.

We came away from a VELESTO briefing feeling upbeat on the overall rig market outlook. The key takeaways are as follows:

1. Petronas-related contracts will have rate revision. VELESTO indicated that all contracts with Petronas are set for a rate revision at end-Feb 2024. Consequently, rigs Naga 2, 3, 4, and 6 are expected to benefit from higher DCR beginning Mar 2024, although it keeps close to its chest the quantum of the rate increase.

2. Rig utilisation to sustain in 1HFY24. Its rig utilisation will remain high in 1HFY24, at 90% at the least with most rigs operating under term contracts. However, in 2HFY24, utilisation will ease as four rigs are scheduled for special periodic survey (SPS) maintenance at various times. As such, it guided for rig utilisation of about 80% in 2HFY24. We assume an 84% utilisation rate for FY24.

3. Tender book remains robust. VELESTO's current order book is valued at RM1.7b, primarily consisting of firm contracts. Additionally, the group is actively tendering for contracts worth RM4.3b, with RM1.5b in short-term contracts (under one year) and RM2.8 billion in longer-term contracts. These tenders are predominantly for jobs in Malaysia, followed by Thailand.

Forecasts. Maintained.

Valuations. We also maintain our TP at RM0.31 pegged to 15x FY25F 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 pick up up in upstream capex; (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. Maintain OUTPERFORM.

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 - 29 Feb 2024