Velesto Undervalued, Opportunities For Bargain Hunting

Maybank has tweaked its FY24/25/26E earnings to Velesto Energy by -6%/+0%/-2% to account for: i) higher depreciation, marginally lower utilisation rate but higher DCR assumptions in FY24E; and ii) lower EBITDA margin assumptions in FY26E.

The view for the new FY24-26E assumptions are: i) utilisation rates of 82%/92%/83% and ii) avg realised DCRs of USD119k/127k/135k. With that, the TP is shaved to MYR0.33 (-1sen) based on 13x mid-FY25E EPS (unchanged). BUY.

Contract with Hess extended, N5 to get LT job soon
The house said it understands that Velesto has secured a 1 well job extension from Hess for its N5 rig at significantly higher rates (albeit undisclosed, it assumes it to be at USD130k/day) from June-Aug 2024. We have earlier factored in a 3-month SPS post-completion of the job extension with Hess. Also, the latest rig schedule indicates that N5 is in advanced negotiations of getting a long-term (2-year) job from an oil major based in Malaysia. Details are scarce, but looks forward to a formal announcement by Velesto over the next few months.

Higher DCRs and utilisation rates to propel FY25E EPS
Based on calculations, Maybank said it expects Velesto’s 2Q24 utilisation rate to be higher QoQ at 97% with an average blended DCR of USD116k (1Q24: 94% @ USD107k). It estimates Velesto’s 2Q24 core net profit to range between
MYR50-55m, barring unforeseen cost swings. Also, with N2, N4, N6 and N8 already locked in under LT contracts, coupled with the expectations of higher DCR jobs for N3 and N5 soon, forecasst an avg. DCR of USD127k and a utilisation rate of 92% in FY25E (vs USD119k @ 82% in FY24E). With that, Maybank expects yet another strong EPS growth of 61% YoY in FY25E.

Valuations are attractive after recent pullback
The house thinks that Velesto’s recent share price weakness offers bargain hunting opportunities. Velesto currently trades at 8.2x FY25E PER and views its risk-to-reward to be favourable given its strong growth prospects in FY24- FY25E. Velesto is the sector’s top BUY pick.

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