VELESTO's 1QFY24 results met expectations. Its 1QFY24 earnings jumped 2.4x YoY due to higher rig utilisation and charter rates on a moderate increase in cost. We see a dip in rig utilisation in 2HFY24 before improving in FY25F. The tight market at present gives VELESTO the opportunity to secure new charters at higher rates. We maintain our forecasts, TP of RM0.34 and OUTPERFORM call.

Its 1QFY24 core net profit came in at 32% and 29% of our full-year forecast and the full-year consensus estimate, respectively. However, we consider the results within expectations as we expect slightly weaker 2H given that three rigs will undergo the special periodical survey (SPS), which will put a dent to rig utilisation. No dividends were declared for the quarter.

YoY, its 1QFY24 topline rose 18% driven by an increase in overall rig utilisation from 90% to 94% and a a higher daily charter rate (DCR) of USD 107,000/day (from USD 86,000/day previously). Its core profit soared 2.4x on a moderate increase in operating cost and lower finance cost.

QoQ, its 1QFY24 revenue declined by 6% due to fewer work orders for its integrated rig, drilling, and completion (i-RDC) services. Its rig utilisation remained relatively flat but the average DCR saw a slight increase. However, its core profit dropped by 30% on higher repair costs and depreciation.

Outlook. Currently, all its six rigs are operational. However, two rigs, Naga 2 and Naga 5, will complete their current charters at the start of 3QFY24 and will then begin their SPS. Naga 6 is set to start its SPS in 4QFY24. Consequently, its rig utilisation will decrease in 2HFY24. It is poised to secure new charters at higher DCR, given the robust demand for jack-up rigs at present, paving the way for better FY25F earnings.

Forecasts. Maintained.

Valuations. We maintain our TP of RM0.34 pegged to unchanged 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. 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 - 24 May 2024