We left VELESTO’s analyst briefing with the following key takeaways: (i) expect temporary downward pressure on DCR in 2025/2026; (ii) strong earnings to sustain in 2QFY24; and (iii) aims to venture into production services and pledged net zero emission by 2050. No change to earnings forecasts. Maintain Buy with unchanged TP of RM0.33/share based on 12x CY25 EPS. VELESTO is expected to continue benefiting from escalating DCR amidst tight jack-up drilling rig market.

Expect Temporary Downward Pressure on DCR in 2025/2026

Recap that Saudi Aramco startled the market by sending out suspension notices to several drilling contractors, with as many as 22 jack-up contracts reportedly suspended. There were concerns of excess supply of rigs from the Middle East relocating to Southeast Asia, hence lowering the region’s DCR in the process. According to analysis by VELESTO, up to 8 rigs might be competing for long-term jobs in Southeast Asia. The group expects temporary downward pressure on DCR in 2025/2026. However, management believes that the global jack-up rig demand remains strong with the ongoing tenders sufficient to absorb affected rigs.

Strong Earnings to Sustain in 2QFY24

The higher DCRs from VELESTO’s latest contract extension for 3 of its rigs with Petronas Carigali take effect only in Feb 2024, while the new DCR for contract extension with Carigali HESS will be effective from Apr 2024. Hence, the average DCR is expected to continue rising in 2QFY24. The utilisation rate should also remain strong as all the rigs have jobs throughout 2QFY24 with no maintenance scheduled. Additionally, management disclosed that the operational efficiency stood at 99% since the start of April. Overall, we expect strong earnings in the coming quarter from higher average DCR and utilisation rate.

To Venture Into Production Services and Pledged Net Zero by 2050

Management revealed that the group has tendered for deepwater drillship project in Malaysia. The group was in discussion with a party to collaborate in the tender by providing onshore supports. VELESTO will not be involved in the technical aspects of deepwater drilling and will unlikely participate with heavy involvement. The reason for the tender is because VELESTO has the Petronas license for drillship category. VELESTO also has no intention to add more drilling assets but plans to be more asset light and to move into production services that is more resilient against the cyclical nature of the industry. VELESTO is exploring opportunities, either through M&A, partnership or joint venture, but has not determined any target. Management believes that by going asset light and by venturing into the production services space, the group can achieve its aspiration of ensuring a future ready and sustainable business with a mission to achieve RM2bn in revenue and a ROCE of above 10% by 2030.

Separately, in terms of sustainability efforts, VELESTO has recently pledged to net zero emission by 2050 and plans to roll out a comprehensive net zero roadmap by the end of the year.

Impact

No Change to Earnings Forecasts.

Valuation

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

Source: TA Research - 27 May 2024