This article first appeared in The Edge Financial Daily on August 23, 2018
Velesto Energy Bhd
(Aug 21, 28 sen)
Maintain buy with a target price (TP) of 34 sen: Velesto Energy Bhd’s first half of financial year 2018 (1HFY18) core loss came in at RM32.1 million and we deem the results within our expectations of FY18 profit estimate of RM3.4 million but below the consensus RM12.3 million estimates as we expect Velesto to register stronger earnings in 2HFY18 on the back of higher rig utilisation. No dividend was declared, as expected.
Year-on-year, its core loss narrowed by 54% to RM22.5 million (from RM49 million in the second quarter a year ago [2QFY17]) mainly due to lower depreciation charge (-27%) and lower finance cost (-44%) despite lower average utilisation rate of 59% (versus 68% in 2QFY17).
On a quarter-on-quarter basis, core loss widened by 1.3 times from RM9.6 million in 1QFY18, largely dragged down by lower average utilisation rate of 59% (versus 65% in 1QFY18) masking lower finance cost (-9%).
Year to date, Velesto’s 1HFY18 core loss narrowed by 79% from RM153.3 million in 1HFY17 thanks to higher vessel utilisation of 62% (versus 47% in 1HFY17), lower depreciation (-31%) and lower finance cost (-44%).
Currently, all seven rigs are contracted and thus we expect full-year average utilisation to hit 75%. Worldwide rig demand for FY18-FY19 had improved to 349-380 as of June data (versus 338-378 as of April) with more than half of the demand coming from the Middle East and India.
However, this may still be insufficient to cater for all the 448 available jack-up rigs available globally (of which 27% remained idle as of June) coupled with the potential 90 rigs coming out from the yard in the next three years.
Nonetheless, management is still confident that the supply demand dynamics will improve in the longer run as 40% of the global rig fleet are aged more than 30 years, indicating that a significant number of rigs could be scrapped in the longer run, providing a significant boost to the daily charter rate.
Forecast is unchanged pending the 2QFY18 analyst briefing on Tuesday. Maintain “buy” recommendation with a TP of 34 sen based on one times FY19 price-to-book value multiple. We like Velesto for being the largest domestic jack-up rig owner to benefit from the demand uptick in jack-up rig amid the stabilisation of oil prices. — Hong Leong Investment Bank Research, Aug 21