Velesto Energy: A Strong Buy Amidst Rig Market Uncertainties

Investment Recommendation:
BUY Velesto Energy (VEB MK) with a target price of RM0.25, offering an upside of 31.5% from the current share price of RM0.19.

Investment Thesis:
Velesto Energy, Malaysia’s leading jack-up (JU) rig service provider, has shown resilience in a volatile energy sector. Despite challenges such as project delays and market uncertainties, the company has demonstrated its ability to secure contracts and maintain operational efficiency. This is reinforced by its consistent performance, ability to adapt to changes in local rig requirements, and operational upgrades across its rigs.

The investment thesis revolves around Velesto’s strategic positioning in the Southeast Asian rig market, its ability to secure contracts in a tight market, and improved operational efficiencies leading to increased earnings forecasts. The company’s forecasted revenue and earnings growth are supported by higher rig utilization rates and strong demand in regional markets, making it a compelling buy opportunity.

Detailed Company Analysis:

1. Financial Results:

   • Velesto has demonstrated strong revenue growth, with an expected turnover of RM1.215 billion in FY2023, growing to RM1.472 billion in FY2024. The company’s EBITDA is projected to rise from RM360 million in 2023 to RM457 million in 2024, driven by higher rig utilization and operational efficiencies.
   • Velesto’s net profit is forecasted to surge to RM183 million in 2024 from RM100 million in 2023, reflecting a notable recovery in the oil & gas sector and increased demand for rig services.
   • Velesto’s balance sheet remains strong, with a net cash position projected for 2024. The company’s debt-to-equity ratio is expected to decline, further improving its financial stability.

2. Stock Impact:

   • The company is forecasted to experience some idle rig time in 2H24 due to maintenance activities. However, the overall impact is expected to be minimal as Velesto has secured contracts for rigs Naga 2 and Naga 3.
   • The global rig market is expected to remain tight, which will benefit Velesto as rig consolidation among major players limits competition. Velesto’s ability to secure long-term contracts in Vietnam and Malaysia, despite a tight market, is a positive indicator of its strategic positioning.

3. Earnings Revisions/Risks:

   • The company’s earnings forecast for 2024-2026 has been upgraded by 11-49%, reflecting improved operational efficiency, better-than-expected utilization rates, and higher daily charter rates (DCR).
   • Risks remain in the form of potential delays in contract replenishment, particularly for Rig Naga 5, which faces challenges due to project rationalization in Sarawak. However, Velesto’s strong track record of securing contracts mitigates this risk.

4. Valuation and Price Catalysts:

   • Velesto’s current valuation offers an attractive entry point for investors. The company is trading at a P/E ratio of 10.6x for FY2024, which is lower than the industry average, making it an undervalued asset in a recovering oil & gas market.
   • The target price of RM0.25 is based on a 5x EV/EBITDA multiple, reflecting the company’s strong fundamentals and earnings potential.
   • Key catalysts for share price appreciation include improved rig utilization, contract renewals, and the potential for higher DCRs as the global rig market remains tight.

Financial Targets:

• Target Price: RM0.25
• Stop-Loss Price: Not explicitly mentioned in the report.

Recommendation Date:
10 September 2024

Broker Information:
This report was issued by UOB Kay Hian, a leading financial advisory and brokerage firm.

Conclusion:
Velesto Energy emerges as the top recommendation due to its strong financial position, growth potential, and ability to navigate the complexities of the rig market. Its operational upgrades and improved earnings forecasts make it a solid buy for investors looking to capitalize on the recovery of the oil & gas sector.