Kenanga Upgrades Call To Market Perform For Velesto; Upbeat On Local Rig Outlook

Kenanga Research upgraded its call to MARKET PERFORM from UNDERPERFORM for Velesto Energy Bhd (Velesto), as it is positively upbeat on the local rig market outlook after an engagement with the group.

In its Company Update today (Jan 17), the research house said Velesto anticipated stronger average daily charter rates (DCR) in FY24, as the group had a contract renewals for four rigs but flattish utilisation at 80 to 85% due to significant maintenance activities.

“Velesto’s rig utilisation to surge in 4QFY23 and it projects a substantial increase in rig utilisation rates in the upcoming reporting quarter, targeting a 90% utilization rate as multiple rigs entered full operations.

“The average DCR for the rigs is anticipated to remain at USD97,000 per day in 4QFY23, consistent with the achieved rates in 3QFY23,” it said.

It raises its FY23-24F earnings forecasts by 20% and 46%, and lifts its TP by 53% to RM0.26 from RM0.17, with no adjustment to TP based on 3-star ESG rating.

“(This is) based on 15x FY24F PER, at a slight premium to valuations of regional drilling peers, Vietnam Oil and Gas Group (Petrovietnam is based on 14x) due to the group’s supportive client, Petronas.

“We upgrade our FY23 and 24F earnings projections by 20% and 46% respectively, factoring in higher average DCR assumptions.

“FY23 is adjusted from USD90,000 per day to USD93,333 per day while FY24 is adjusted from USD107,000 per day to USD118,300 per day). Our assumptions for rig utilisation stand at 83% for FY23 and 84% for FY24,” it said.

CGS-CIMB said in addition to NAGA 8, which has secured a DCR of USD137,000 per day, Naga 2, 4, and 5 will undergo charter renewals at various points in FY24.

“Velesto indicates that the DCR for new contracts will fall within the range of USD120,000-130,000 per day, potentially surpassing our initial expectation of USD107,000 per day for FY24.”

Meanwhile, the research house said that Velesto expects that flattish utilisation (as mentioned), with average rig utilization to fall within the range of 80% to 85%, similar to FY23 as four rights to come under scheduled maintenance.

“The four rigs are (Naga 2, Naga 3, Naga 5, and Naga 6). The estimated major maintenance cost per rig is USD10 million, and the company plans to depreciate these costs over the next five years, following its standard practice,” it added.

It likes Velesto due to the positive outlook of the local jack-up rig market, its strengthened bargaining power as a result, and the potential upside surprises to its margins.

“However, we acknowledge Velesto’s significant scheduled maintenance activities in FY24 which could limit its earnings upside. Nonetheless, its valuations have become more reasonable after our earnings upgrade,” it added.

The risks to CGS-CIMB call include a sharp plunge in crude oil prices, lower-than-expected DCR on rig contract renewals as well as longer-than-expected maintenance duration for rigs.

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