We left VELESTO’s analyst briefing with the following key takeaways: (i) GAIT 1 is decommissioning in 2024; (ii) DCR is still trending upward; and (iii) Expect higher rig utilisation rate in 4QFY23. Overall, we expect an exceptional performance in 4QFY23 on the back of higher rig utilisation rate and higher DCR. No change to our earnings forecasts. Maintain Buy with an unchanged target price of RM0.33/share pegged to 7.5x CY24 EV/EBITDA.

GAIT 1 Decommissioning in 2024

Velesto Energy Berhad (VELESTO) plans to decommission GAIT 1 in 2024 following failure to secure any jobs in 2023. Notably, GAIT 2 has been decommissioned this year due to high cost to reactivate the idled hydraulic workover (HWU) unit. Similar as GAIT 2 that has been decommissioned, we do not expect any asset impairment charges as we believe the book value was likely written off earlier.

DCR Still Trending Upwards

Global jack-up drilling rig market remains tight, with IHS forecasting 95% utilisation rate in 2024 and 94% utilisation in 2025. Notably, the utilisation rate of jack-up drilling rigs in Southeast Asia remains at 100%. Daily charter rate (DCR) continues to trend upwards. DCR in Malaysia from Jan 2023 to Nov 2023 ranges from USD90k per day to USD145k/day, while that in Southeast Asia hovers between USD68k per day to USD165k/day. As oil price is expected to remain resilient while the rig market remains tight, DCR should continue the uptrend.

Expect Higher Rig Utilisation Rate in 4QFY23

VELESTO is currently working to secure contracts from 2024-2026, mainly targeting longer term contracts to reduce the number of downtimes between projects. According to management, the operational performance is good in Oct and Nov 2023. The group expects the jack-up drilling rig’s utilisation rate to improve to above 90% in 4QFY23 (3QFY23: 62% due to various scheduled maintenance activities). Overall, we expect an exceptional performance in 4QFY23 on the back of higher rig utilisation rate and higher DCR.

Impact

No Change to Our Earnings Forecasts.

Valuation

Maintain Buy with an unchanged target price of RM0.33/share pegged to 7.5x CY24 EV/EBITDA.

Source: TA Research - 1 Dec 2023