Velesto Energy Bhd
Buy. Target price: RM0.35
ON Friday, Velesto announced that it has secured 3 contract extension for N2, N4 and N6 from PCSB for 2 years, ascertaining the utilisation rates for all 3 rigs over the next 24 months (ex-SPS). The total contract value for the extension amounts to US$265 million (RM1.3 billion), with an effective DCR of approximately US$130k, based on our estimates. These contract extension came in within our expectations (link) as the 3 of the aforementioned rigs were slated to complete/end their jobs by end-Q2’24: i) Vestigo (N2) by end-Q2’24; ii) PCSB (N4) till end-Q1’24; and iii) PCSB (N6) till end-Q2’24. We think that the supply tightness that the Jack-Up rig industry is facing accentuates Velesto’s job win prospects with relative ease. We are positive on this development.
With expectations of: i) blended utilisation rate of 94% and an average DCR of RM98k in Q1’24E; and ii) blended utilisation rate of 89% with an average DCR of RM107k in Q2’24E, we believe that Velesto will rake in at least 2 more strong quarters ahead, before having 3-4 SPS (special periodical survey) in 2H24. Also, postbriefing, we tweak our dividend payout ratio to 20% (from 30% previously).
Based on our analysis, we understand that the JU drilling rig market is tight, where demand outstrips supply due to elevated crude oil prices. As at Jan 2024, the highest DCR recorded for a regional competitor’s rig was US$165k (vs. an average of US$131k a year before). We expect Velesto to continue riding on higher DCRs as the group wins new jobs/renews its existing contracts in the near future.
Our unchanged TP of RM0.35 is based on 14x PER based on mid-FY25E EPS. Maintain BUY.