While Maybank Investment Bank has raised Velesto Energy’s FY23/24 earnings by 120%/95%, to reflect for the higher DCRs and utilisation outlook and target price (TP) by 18% higher to MYR0.26, on a higher EV/ replacement value multiple of 1x (vs. 0.9x previously). However, Maybank IB has downgraded the stock to HOLD.
As most of the positives (earnings turnaround, higher DCRs/ utilization) have been priced in, with minimal catalyst ahead. It should consider capitalizing on this upcycle, by monetizing its JUs and pivoting away from jack-ups (JUs) to remain relevant in the LT.
JUs are in great demand now
The global demand for JUs in 2023 is tightening (on rising offshore capex, absence of newbuilds), in favour of drilling operators and this trend is expected to last for at least the next 24 months. Utilisation is expected to sustain above 80%, and DCRs will continue to steadily pick up.
The benchmark range in SEA for the: (i) JU 361-400 category has risen to USD132k-134k in 2023 (vs. USD88k-131k a year ago) while the (ii) JU 301-360 IC range remains steadily at USD120k–12k.
Charter tenures are lengthening, for oil majors tend to favour a longer contract, on concern over missing out on assets. Conversely, JU operators now prefer a shorter term charter, for they are keen to capitalize on the rising DCR trend.
Raise DCRs, utilisation and earnings estimates
For this, the research house has raised its FY23-24 DCRs to USD90k-100k (+13%-18%). This is a more realistic assessment now (+USD10k-15k in DCRs) relative to the market condition vs. its previous upgrade (+5k-10k in DCRs) in Sep 2022.
Based on the research house’s sensitivity analysis, every USD1k increase in DCR would raise its FY23’s net profit by MYR6 million. That said, it has also raised our FY23-24 utilization estimate to 80%-85% (+5.4-6.0-ppts YoY), to reflect the rising optimism.
Needs to pivot from JUs to remain relevant
That said, most of the positives (the chase for higher earnings) have already been priced in, according to the reseach house. To catalyse growth and remain relevant, Velesto should take the lead to monetise some of its JUs (which are currently in demand), with a replacement value of USD85m-100m/ unit.
Ability to execute that shall see Velesto turn net cash, de-risk from the JU volatile cyclical market, recycle capital & pivot away from O&G, to a new business that could provide it with a new, LT ESG-flavoured lifeline.
Upside swing factors identified are recovery in crude oil prices a near-term stock driver; rising utilisation/DCRs and margin expansion are key catalysts; though unlikely in our view, a potential privatisation exercise would likely generate excitement.
Meanwhile, downside risks identified are further weakness in oil price will hurt share price performance; execution mishap, cost overruns and / or absence/ non-extension of charters will cause adverse reaction; failure to meet debt repayment/covenant is a sign of financial distress.
