FY22F likely in the red; FY23F may improve
? 1Q22 core net loss of RM46m was below expectations against our full-year
profit forecast of RM35m and consensus loss forecast of RM12m.
? Reiterate Hold with lower DCF-based TP of 11.5 sen as we cut our FY22F
utilisation assumption and raise the cost of equity discount rate.
? We expect Velesto to report a quarterly loss in 2Q22F that is fairly similar to
1Q22, and for FY22F to be in the red, though we expect profits in FY23F.
Poor 1Q22 and low 2Q22F expectations; more 2H22F work needed
Velesto’s 1Q22 core net loss of RM46m was a significant deterioration from 4Q21’s
RM12m core net profit, due mainly to the qoq drop in jack-up (JU) drilling rig utilisation to
39% in 1Q22 from 74% in 4Q21. Nevertheless, Velesto narrowed its loss yoy, as the JU
utilisation in 1Q22 was better than 1Q21’s 28%, depreciation fell due to the write-off of the
Naga 7 JU rig which sank on 3 May 2021, and interest expense also dropped as Velesto
used the insurance compensation to reduce its outstanding debt. We do not expect much
improvement for Velesto in 2Q22F. Drilling contracts secured to-date suggest utilisation of
just 41%, a marginal improvement from 1Q22’s 39%; hence we expect Velesto’s 2Q22F
core net loss to be almost as large as for the 1Q22. Assuming no additional work, Velesto
may deliver 55% utilisation in 3Q22F and 62% in 4Q22F, which is insufficient to report
profits for 2H22F. This implies 49.5% utilisation for FY22F, just slightly better than FY21’s
disappointing 48% utilisation. Having said that, we expect new work to emerge for Naga 5
and Naga 6 in 2H22F, both of which have barely drilled this year and have not yet secured
any forward jobs. In the most optimistic scenario where all available Naga 5 and Naga 6
capacity in 2H22F is fully utilised, we calculate that Velesto can at most achieve 65%
utilisation for FY22F, or 57% if half of available Naga 5 and Naga 6 capacity in 2H22F is
utilised. We have adopted 57% as the basis for our new FY22F utilisation assumption,
revised lower from 70% previously.
FY23F outlook should be better; cost inflation remains a risk
The outlook for FY23F may improve because higher oil prices tend to spill over into higher
drilling capex by oil companies with a lag. Hence, we retain our FY23F utilisation
assumption of 70%, which is a step-up from FY22F’s 57% utilisation. Velesto’s average
charter rates may also benefit after this year’s upgrade of the Naga 5 and Naga 6 to
possess offline capabilities, which typically lifts rates from the low-US$70,000s to the highUS$70,000s. Conversely, it may be difficult for Velesto to achieve utilisation higher than
70% unless it secures long-term contracts, which at the moment, remain rare. Apart from
the Naga 5 and Naga 6, rate upside may be capped by Velesto having assigned all of its
rigs to Petronas Carigali’s call-out umbrella contract for the next two years, effective 1Q22.
Cost inflation remains a concern, due to the rush to secure manpower and other resources
as drilling work throughout SE Asia picks up pace. The main upside risk relates to the
potential for utilisation rates to exceed our 70% assumption, but the key downside risk is
for cost inflation to undo Velesto’s 3-year cost optimisation efforts.