Review

• Velesto Energy Bhd’s (VELESTO) 1QFY24 results came in within expectations at 31% of ours and 28% of consensus’ full-year forecasts. We deem the results to be within expectations as we expect lower utilisation rate in the remaining quarters due to 5-yearly special periodic survey (SPS) for 3 of its jackup rigs, which typically last 2-3 months each.

• QoQ: Stripping off extraordinary items, including non-recurring RM17mn from reversal of provision for NAGA 7 incident’s claims and excellent 99% operational efficiency in 4QFY23, 1QFY24 core profit slid 5.0% QoQ dragged by all three segments. Drilling segment’s 1QFY24 PBT dipped 8.5% QoQ despite similar utilisation rate and higher average DCR at USD107k (4QFY23: USD99k), driven by higher depreciation for Naga 4 following the completion of SPS in August 2023 and accelerated depreciation for certain drilling assets. Integrated Project Management’s PBT plunged 76.2% QoQ on the back of lower progress for i-RDC projects.

• YoY: Core profit more than tripled YoY boosted by higher average DCR (1QFY24: USD107k; 1QFY23: USD86k) and utilisation rate (1QFY24: 94%; 1QFY23: 90%). This was despite lower contribution from Integrated Project Management segment due to lower utilisation rate of hydraulic workover units.

Impact

• After incorporating FY23 annual audited numbers, we tweak our FY24- FY26 earnings forecasts by 0.1%-0.5%.

Outlook

• Recently, Saudi Aramco startled the market by pausing its oil expansion programme, sending out suspension notices to several drilling contractors, with as many as 22 jack-up contracts reportedly suspended due to the production rejig. There were concerns of excess supply of rigs from Middle East relocating to Southeast Asia, hence lowering the DCR in the process.

• We believe VELESTO is largely shielded from the suspension as 4 out of 6 of the group’s rigs are contracted up to 4QFY25. Additionally, VELESTO’s average DCR still has room to increase, with latest average at USD107k in 1QFY24, still below c.USD120k-USD140k estimated DCR for the group’s latest project wins from Petronas Carigali Sdn Bhd.

• As the renewed DCR from its latest contract extension commences only in Feb 2024, we expect the average DCR to continue rising in 2QFY24. However, this may be offset by lower utilisation rate as Naga 2, Naga 5 and Naga 6 will be undergoing SPS in the remaining quarters of FY24.

Valuation

• Reiterate Buy with an unchanged TP of RM0.33/share pegged to 12x CY25 EPS. VELESTO is expected to continue benefiting from escalating DCR amidst tight jack-up drilling rig market.

Source: TA Research - 24 May 2024