Maybank Investment Bank Bhd (Maybank IB) has reiterated its BUY call on Velesto Energy Bhd with an unchanged target price of 25 sen, citing the company's strong regional tenderbook and the recovery in the JU rig market expected from the second half of 2025. The research house believes Velesto's strategic expansion into regional jobs will provide a solid hedge against a potential downcycle in Petronas' capital expenditure in 2025.
Maybank IB also highlighted the company's robust balance sheet, which could lead to improved dividend payout ratios (DPR) in the future, enhancing its attractiveness as a dividend yield stock.
In its third-quarter 2024 (3Q24) results, Velesto recorded a significant 69% quarter-on-quarter increase in its tenderbook, rising to RM5.4 billion from RM3.2 billion at the end of the previous quarter. This growth was mainly driven by an uptick in long-term (LT) tenders for rigs N3 and N8, which are expected to be deployed in Thailand and Vietnam.
The research house sees this move as a positive development that will provide earnings visibility from 2H25 until the end of 2026. Despite the likelihood that these LT tenders may be secured at lower day charter rates (DCRs), they will contribute to higher utilisation rates and help secure earnings for Velesto.
Maybank IB also noted that while the JU rig market is expected to experience a temporary slowdown in the first half of 2025 (1H25), demand is projected to pick up again in 2H25 through 2026. To regain investor confidence and boost its stock performance, Velesto needs to secure additional regional long-term contracts, which would provide earnings certainty for FY25-FY26 and beyond. Alternatively, increasing its DPR, supported by strong free cash flow (FCF) generation, could be another catalyst for a re-rating.
The analyst forecasts that Velesto will generate an FCF of RM309 million in FY25, turning net cash of RM202 million by the end of the year. With the company's solid cash flow position and healthy DCRs expected to continue, Maybank IB believes Velesto has the potential to raise its DPR, which would further enhance its dividend yield appeal.
