VELESTO has obtained contract extensions for Naga 2, 4, and 6 with daily charter rates (DCRs) of between USD114,000 and USD133,000, surpassing our estimates. We keep our FY24F forecast on maintenance for four rigs but raise our FY25F earnings forecast by 10%. Correspondingly, we lift our TP by 10% to RM0.34 (from RM0.31) and maintain our OUTPERFORM call.

VELESTO has obtained contract extensions for its Naga 2, Naga 4, and Naga 6 jack-up rigs, with contract value of USD73m, USD95m, and USD97m, respectively. These extensions are for an additional two years starting from February 2024. The estimated implied DCR for Naga 2, Naga 4, and Naga 6, based on their extension values, are USD114,300, USD130,000, and USD133,000, respectively. This exceeds our initial DCR assumption of USD120,000 for FY24, indicating a favourable outcome for VELESTO.

Forecasts. We are keeping our FY24F forecast unchanged, adopting a conservative stance in light of the expected impact from four special periodic surveys (SPS) that may affect overall rig utilisation. However, we have raised our FY25F earnings forecast by 10%, adjusting for a higher average DCR of USD125,000, up from USD122,500, reflecting an improved outlook for DCRs.

Valuations. We lift our TP by 10% to RM0.34 from 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 - 25 Mar 2024