Review

• Velesto Energy Bhd’s (VELESTO) 9MFY23 core profit of RM34.3mn (9MFY22: core loss of RM77.7mn) accounted for 57% of ours and 49% of consensus’ full-year forecasts respectively. However, we deem the results as within our expectations but below consensus estimates as we expect VELESTO to register a stellar 4QFY23 results from higher rig utilisation rate and average daily charter rate (DCR).

• QoQ: 3QFY23 revenue grew 3.6% QoQ due to higher utilisation rate of hydraulic workover units (HWU) and higher progress of Integrated Rig Drilling Completion (i-RDC) services. However, PBT plunged 86.2% QoQ on the back of lower drilling rig utilisation from various scheduled maintenance works and higher operating expenses such as maintenance costs. Notably, PBT margin of Drilling Services segment dipped 16.6%-pts to 3.7% despite higher average DCR (2QFY23: USD 94k/day; 3QFY23: USD 97k/day) dragged by lower drilling rig utilisation rate.

• YoY: 3QFY23 revenue soared 66.4% YoY supported by: (i) higher DCR for rigs (3QFY22: USD 74k/day; 3QFY23: USD 97k/day); (ii) higher HWU utilisation rate and (iii) greater progress of i-RDC services. Nonetheless, PBT plunged 81.0% YoY driven by higher operating expenses (depreciation of ERP system) and finance costs (+35.6% YoY).

• YTD: 9MFY23 revenue more than doubled YoY on the back of (i) higher DCR and rig utilisation rate; (ii) higher HWU utilisation rate; and (iii) greater progress of i-RDC services. Consequently, the group registered PBT of RM41.4mn compared with LBT of RM71.0mn in the corresponding period last year in line with revenue growth.

Impact

• No change to our earnings forecasts pending granularity from the analyst briefing later today.

Outlook

• Capex spending for exploration and production by major oil producers is expected to grow further supported by resilient oil prices. The jack-up rig’s utilisation rate at Southeast Asia remains at 100%. This, coupled with heightened competition for jack-up rigs globally, should provide favourable upside to the average DCR, hence boosting VELESTO’s bottom-line. Evidently, DCR continues trending upwards in the latest fixtures.

• Barring any unforeseen circumstances, we expect the group to register an exceptional results performance in 4QFY23 on the back of high utilisation rate, which we forecast to be above 95%, as well as higher average DCR. With tight competition for jack-up rigs globally, we expect VELESTO to secure more contracts from FY24 onwards at higher DCR and to report even better performance in FY24.

Valuation

• Reiterate Buy with an unchanged TP of RM0.33/share pegged to 7.5x CY24 EV/EBITDA.

Source: TA Research - 30 Nov 2023