KUALA LUMPUR (Feb 28): Shares of Velesto Energy Bhd were actively traded on Tuesday as its stock price nosedived nearly 31% following the group posting a net loss of RM26 million for its fourth quarter ended Dec 31, 2022 (4QFY2022).
Velesto opened at 23.5 sen on Tuesday, a big drop from Monday’s close of 27.5 sen. At the end of the morning trading session, the counter had fallen by as much as 9.5 sen or 34.5% to its intraday low of 18 sen.
The stock, however, pared some losses while staying range bound for the remainder of Tuesday.
At the closing bell, Velesto was still down by 8.5 sen or 30.9%, as the counter settled at 19 sen, with 581.07 million shares traded, giving it a market capitalisation at RM1.53 billion.
It was the most active counter on Tuesday, followed by Hartalega Holdings Bhd and Gamuda Bhd.
On Monday (Feb 27), Velesto posted a net loss of RM26 million versus a net profit of RM5.43 million a year ago, as the bottom line was hit by higher operating expenses, finance costs and taxation.
Hong Leong Investment Bank (HLIB) Research had downgraded Velesto to 'sell' at 28.5 sen, with a lower target price (TP) of 21 sen (from 29 sen) and said Velesto reported a 4QFY2022 core net profit of RM2.6 million (-82% q-o-q, -52% y-o-y), which brought FY2022 core net loss to RM71.8 million (FY2021: -RM182.1 million).
In a note on Tuesday (Feb 28), the research house said it deemed the results to be below house (FY22f: -RM17.9 million ) and consensus expectations (FY22f:-RM27.9 million).
HLIB said it is expecting a substantially stronger showing in FY2023, as Velesto has guided at significantly higher utilisation rates and daily charter rates for its jack-up drilling rigs.
“With that, we are forecasting Velesto to turn profitable in FY23-24, as we expect to see a pick-up in drilling rig tenders this year amid the current elevated crude oil price environment, leading to increased activity in the sector.
“We downgrade Velesto Energy to ‘sell’ with a lower TP of 21 sen — pegged to an unchanged P/E multiple of 14x on revised FY24f profits.
“We think Velesto’s valuations are rich and has gone past its fundamentals, despite its strong turnaround prospects and growth trajectory,” it said.
Meanwhile, Maybank Investment Bank downgraded the counter to 'sell' with an unchanged TP of 26 sen, based on one times its enterprise value/replacement value.
“Excluding the one-offs in 4Q2022, core results came in below, on cost escalation effect, which led to a 6%-8% cut in FY2023-2024 earnings.”
“While earnings are expected to turn around from FY2023 on a better operating outlook (higher DCRs, utilisation), these positives have been priced in.”
“In our view, most of the positives have been priced in. To catalyse growth and remain relevant, Velesto should take the lead to monetise some of its jack-up rigs (which are currently in demand), with a replacement value of US$85 million to US$100 million per unit. Ability to execute that shall see Velesto turn net cash, de-risk from the jack-up rigs’ volatile cyclical market, recycle capital and pivot away from O&G (oil & gas), to a new business that could provide it with a new, long-term ESG-flavoured lifeline,” it said.
Kenanga Research has maintained its 'underperform' rating but with a higher TP of 19 sen from 16 sen previously, noting that Velesto’s FY2022 core net loss of RM96 million came in wider than its loss forecast and more than three times larger than consensus estimates.
“We lowered our FY2023F earnings by 30% to account for lower operating margins assumption, while simultaneously introducing new FY2024F numbers.
“Our forecasts are based on a rig utilisation assumption of 80% and charter day rates of US$85,000 — US$100,000.”
Outlook for jack-up rigs, however, are turning a corner after sluggish rig utilisation for the past two years, as regional demand for jack-up rigs is on the rise.
“Nonetheless, we believe Velesto could still suffer from a high cost structure amid supply chain disruptions.”
“As such, we see successful renegotiation of contracts to higher charter rates as crucial for Velesto to continue operating profitably.”
Meanwhile, CGS-CIMB has downgraded the counter from 'add' to 'hold' with a lower discounted cash flow-based TP of 27 sen, from 28.5 sen.
“We expect that investors will be disappointed with the FY2022 results and will take the opportunity to lock in profits after a staggering 90% price appreciation over three months.
“Our opex (operational expenditure) assumption remains at US$30,000/day for FY2023F for now, but we may be forced to revise it higher if Velesto does not offer a satisfactory explanation for why 4Q2022 drilling opex rose to US$41,000/day at its post-results briefing today (Tuesday),” it said.
CGS-CIMB added that Velesto’s 4Q2022 core net loss of RM26 million was disappointing, even as jack-up utilisation rose further quarter-on-quarter to 90% in 4Q2022 — exceeding its own expectation of 87%.