KUALA LUMPUR: Hong Leong Investment Bank (HLIB Research) suggests that investors direct their attention to Velesto Bhd, considering its notable decrease in stock price and the potential for a forthcoming rebound.
Velesto's shares plummeted by 11 per cent, dropping from its recent peak of 31.5 sen to 28 sen on the last trading day.
This decline followed news of Saudi Aramco suspending JU rig contracts with several drilling contractors, which could potentially lead to an increase in JU rig supply to the Southeast Asian region.
HLIB Research has a buy call with a target price (TP) of 35 sen for Velesto, indicating a potential upside of 25 per cent.
Notably, the consensus TP for Velesto ranges from 29 sen to 35 sen, with some even factoring in the negative ramifications of the Saudi Aramco event into their forecast.
"Following the decline, we believe that the risk-reward profile turned attractive, particularly considering its strong earnings trajectory projected for the fiscal years 2025 (FY24f) and FY25f.
"Although the potential increase in JU rig supply to SEA might limit the upside of DCRs in the region, we anticipate the robust DCRs to sustain over the near term, as global national oil companies continue to maintain robust capex (capital expenditure) budgets amidst buoyant oil prices," it said in a note.
Additionally, it said that Velesto has secured contracts for up to 80 per cent of its capacity for FY24f and 62 per cent for FY25f.
"We anticipate Velesto's earnings for FY24f and FY25f to rise by 89.5 per cent and 10.3 per cent, respectively, driven by the heightened DCRs and utilisation rate.
"The global drilling market is currently experiencing an upward cycle due to a crunch in drilling rigs, resulting in robust utilization rates and strong bargaining power for rig owners in pricing their DCRs.
"With the global rig market nearing full utilisation (of about 90 per cent), contracted rigs have been increasing in recent quarters while supply has decreased due to rising demand for drilling activities.
"This crunch is particularly severe in the SEA region, where all available rigs have been fully utilised as of November 2023, with DCRs reaching as high as US$145,000 to US$165,000, representing a year-on-year increase of 40 to 60 per cent," it said.
