CGS International
May 27, 2025
Velesto Energy Berhad: Doubling Down on Dividends, Cost Discipline, and Sector Outlook – A Comprehensive Investor Guide
Overview: Major Earnings Beat, Dividend Surge, and Upgraded Outlook
Velesto Energy Berhad has delivered a noteworthy first quarter in 2025, outperforming consensus earnings expectations and triggering a major upgrade in its outlook. With a remarkable focus on cost efficiency, an ambitious capital reduction plan, and a forecasted dividend yield that more than doubles previous years, Velesto is repositioning itself as a high-yield favorite in Malaysia’s oil & gas equipment and services sector.
Key highlights include:
- 1Q25 core net profit exceeded both CGS International and consensus forecasts due to lower-than-expected operating costs.
- Dividend per share (DPS) forecast doubled to 2.5 sen for FY25-FY27, implying a 15% annual yield.
- Target price raised to RM0.195, reflecting a total 1-year return expectation of 33% (including dividends).
- Strategic focus on asset-light initiatives and high shareholder payouts rather than capex-heavy expansion.
Financial Performance: Strong Start to FY25 Driven by Cost Optimizations
Velesto’s 1Q25 core net profit of RM53 million was only marginally down (4.6%) quarter-on-quarter, despite a drop in rig utilization to 67% (from 82% in 4Q24) due to the idling of the Naga 3 rig. Key cost savings included:
- 12% quarter-on-quarter drop in cash operating costs.
- 14% reduction in depreciation expense, thanks to the absence of accelerated depreciation on rig equipment seen in FY24.
- 10% headcount reduction in certain divisions, building on rationalization efforts from the previous year.
These measures enabled Velesto to mitigate the impact of lower revenue from decreased rig utilization and flattish daily charter rates (DCRs).
Key Financial Figures (FY23A-FY27F)
|
Dec-23A |
Dec-24A |
Dec-25F |
Dec-26F |
Dec-27F |
| Revenue (RMm) |
1,215 |
1,360 |
846 |
783 |
732 |
| Operating EBITDA (RMm) |
364.2 |
540.8 |
399.4 |
351.1 |
328.9 |
| Net Profit (RMm) |
99.5 |
207.7 |
161.9 |
134.3 |
120.9 |
| Core EPS (RM) |
0.012 |
0.026 |
0.020 |
0.016 |
0.015 |
| DPS (RM) |
0.003 |
0.013 |
0.025 |
0.025 |
0.025 |
| Dividend Yield |
1.5% |
7.6% |
15.2% |
15.2% |
15.2% |
| Net Gearing |
9.4% |
-2.7% |
-11.5% |
-16.1% |
-19.0% |
| P/BV (x) |
0.55 |
0.53 |
0.52 |
0.53 |
0.55 |
| ROE |
4.18% |
8.38% |
6.23% |
5.17% |
4.80% |
Dividends and Capital Management: Aggressive Payouts and Financial Flexibility
Velesto is set to request shareholder approval for a capital reduction exercise at its AGM, aiming to increase retained earnings from a negative RM82 million to a positive RM1.1 billion. This maneuver will enable the company to legally pay dividends above its annual EPS, unlocking a >100% payout ratio. With rig-related debts fully repaid and minimal upcoming special periodic surveys (SPS), Velesto is poised to focus on high shareholder returns rather than heavy reinvestment.
- Forecasted DPS of 2.5 sen for FY25-FY27, double the FY24 payout.
- Dividend yields projected at 15% per annum.
- Payout ratios will exceed 100% over the forecast period.
Operational Outlook: Rig Utilization, Charter Rates, and Cost Discipline
Despite a dip in utilization rates in early FY25, the outlook for the second half of the year is improving:
- 2Q25 utilization expected to fall to 56% as Naga 8’s contract ends in April 2025.
- Utilization forecasted to rebound to 78% in 3Q25 and 83% in 4Q25, with new contracts for Naga 5 (PTTEP Malaysia) and Naga 8 (Petronas Indonesia) starting in July 2025.
- Daily charter rates may soften to below US\$120k/day in 2H25 (from US\$127k/day in 1H25), with Naga 5 expected to fetch US\$110k/day and Naga 8 at US\$95k/day.
- Continued focus on managing overheads and rationalizing costs to offset potential margin pressure.
Latest Contracts Secured
- Naga 4: Contract with Phu Quoc Petroleum Operating Company (Vietnam) for 40 wells, starting late-April/early-May 2026 for over one year at an estimated DCR of US\$111k/day.
- Naga 8: New contract with Petronas Indonesia for 12 firm wells and 3 option wells, commencing July 2025 to February 2026, then resuming July 2026 for two more years. Estimated DCR: US\$95k/day.
- Naga 5: Likely contract with PTTEP Malaysia for one year plus nine-month options, starting July 2025, estimated DCR of US\$110k/day.
Sector and Peer Analysis: Regional and Global Positioning
Velesto’s financial and operational metrics stack up competitively on a regional and global stage, with dividend yields far above most peers.
| Company |
Market Cap (US\$m) |
Core P/E (x) CY25F |
P/BV (x) CY25F |
ROE (%) CY25F |
EV/EBITDA (x) CY25F |
Dividend Yield (%) CY25F |
| Velesto Energy Berhad |
321 |
8.4 |
0.5 |
6.2 |
2.6 |
15.2 |
| China Oilfield Services |
6,909 |
6.8 |
0.6 |
8.9 |
2.5 |
4.9 |
| Arabian Drilling Company |
1,877 |
18.3 |
1.2 |
6.7 |
6.3 |
3.6 |
| ADES Holding |
4,106 |
15.9 |
2.2 |
21.0 |
8.1 |
3.7 |
| ADNOC Drilling |
22,478 |
15.6 |
5.1 |
36.9 |
11.2 |
3.7 |
| Shelf Drilling |
157 |
3.0 |
0.4 |
11.3 |
4.1 |
0.0 |
| Borr Drilling |
392 |
9.2 |
0.4 |
4.3 |
4.8 |
2.4 |
| Transocean |
2,199 |
126.4 |
0.2 |
0.2 |
5.8 |
0.0 |
| Valaris PLC |
2,578 |
11.9 |
1.0 |
9.4 |
6.0 |
0.3 |
| Noble Corp |
3,730 |
15.7 |
0.9 |
5.6 |
4.9 |
8.5 |
| Seadrill |
1,436 |
18.3 |
0.5 |
3.0 |
4.6 |
6.2 |
Sector Trends: Global Jack-Up Rig (JU) Market Insights
- Global JU rig demand and utilization rates have declined in early 2025 compared to the 2023-2024 peak.
- Daily charter rates have not softened yet but are expected to once existing contracts roll over.
- Middle East JU demand has softened, pushing rigs into Southeast Asia and pressuring utilization rates in the region (dropping from 97.8% in 2023 to 80.6% in 5M25).
- Average charter rates in Southeast Asia have softened from US\$110k-130k/day in 1H24 to US\$90k-110k/day in 1H25.
- Indian Subcontinent JU demand is weak, with recent Indian tenders as low as US\$35k/day, compared to previous US\$65k-70k/day averages.
- Far East Asia market remains stable, while West Africa is the only region with increasing demand, though its size is too small to affect global balance.
ESG and Sustainability: Progress and Future Targets
Velesto is making strides in sustainability, aiming for a 10% reduction in carbon intensity per operating day and 30% per revenue ringgit by 2030 (against a 2021 baseline). These targets were exceeded in 2022 and 2023 due to low utilization in the base year, with 2023 emissions intensity per operating day down 28% and per revenue down 62%.
Additional ESG notes:
- Long-term net zero carbon target by 2050, with a detailed pathway to be disclosed by end-2024.
- Most Scope 1 emissions are from rig diesel consumption; energy efficiency initiatives include rig power management systems and solar panel installations at onshore facilities.
- Scope 3 emissions (business travel) were 33 tCO2e in 2022, rising to 66 tCO2e in 2023. More Scope 3 reporting is expected.
- Existing assets are expected to remain relevant through the 2040s, with the oldest JU (Naga 2) retiring in 2039 and the newest (Naga 8) in 2045, assuming 30-year useful lives.
Shareholder Structure and Price Performance
- Major shareholders: Permodalan Nasional Bhd (52.0%), Aberdeen Group Plc (6.4%).
- Current price: RM0.165; Target price: RM0.195; Market cap: RM1,356m (US\$319.8m).
- 12-month absolute price performance: -42.1%.
- Free float: 48.0%.
Investment Conclusion: Add Rating Reinstated Amidst High-Yield Opportunity
CGS International upgrades Velesto Energy Berhad from Hold to Add, citing:
- Substantial upward revisions to core EPS forecasts for FY25-FY27 (up 39-49%).
- Robust cost management, high dividend payout prospects, and strategic asset-light approach.
- Potential risks: a sharp correction in oil prices or further softening of DCRs could impact earnings and delay drilling activity.
Appendix: Key Operating Metrics and Results Tables
| Quarter |
Revenue (RMm) |
Operating Costs (RMm) |
EBITDA (RMm) |
EBITDA Margin (%) |
Net Profit (RMm) |
Core EPS (sen) |
Utilisation Rate (%) |
Charter Rate (US\$/day) |
| 1QFY25 |
224.6 |
110.8 |
113.9 |
50.7 |
52.6 |
0.6 |
67.0 |
127,000 |
| 4QFY24 |
276.1 |
145.8 |
130.2 |
47.2 |
55.2 |
0.7 |
82.0 |
126,000 |
Final Thoughts
Velesto Energy Berhad stands out in Malaysia’s oil & gas sector, offering investors a compelling combination of cost discipline, financial flexibility, and one of the region’s most attractive dividend yields. With a strong operational roadmap, significant contract wins, and a solid ESG trajectory, Velesto is positioned for robust shareholder returns even amidst sector headwinds.
For financial professionals and market watchers, Velesto’s transformation into a dividend powerhouse and its strategic adaptation to sector realities make it a top stock to monitor in 2025 and beyond.
