CGS International Securities
May 27, 2025

Velesto Energy Berhad: Doubling Down on Dividends with Strong Cost Management and Asset-Light Growth

Velesto Energy Berhad: A Deep Dive Into Dividend Growth and Operational Resilience

Velesto Energy Berhad is making significant waves in Malaysia’s oil & gas equipment and services sector. With a robust strategy focused on cost rationalization, high dividend payouts, and an asset-light approach, Velesto is attracting renewed investor attention. CGS International Securities has upgraded its view on the company, citing improved earnings visibility, a stronger balance sheet, and a forecasted dividend yield that stands out in the regional market.

Key Highlights and Summary

• Broker: CGS International Securities
• Date: May 27, 2025
• Current Price: RM0.165
• Target Price: RM0.195 (18.2% upside)
• Market Cap: RM1,356 million (US\$319.8 million)
• Dividend Yield Forecast: 15% (FY25F-FY27F)
• LSEG ESG Combined Score: A-
• Shariah Compliant

1Q25 Results: Cost Discipline Drives Outperformance

Velesto’s 1Q25 core net profit of RM53 million surpassed expectations, reaching 48% of CGS’s and 41% of consensus full-year forecasts. This outperformance was achieved despite a lower rig utilization rate (67% vs. 82% in 4Q24), as the company swiftly reduced cash operating costs by 12% quarter-on-quarter and depreciation expenses by 14%. The cost discipline arose from a 10% headcount reduction and the absence of accelerated depreciation that occurred in FY24.

Even though the Naga 3 rig was idle in 1Q25, resulting in lower utilization, Velesto’s agile cost management shielded its earnings from a sharper decline. The average daily charter rate (DCR) remained steady at US\$127,000/day, with most rigs continuing on existing contracts and Naga 5 remaining unemployed.

Cost Rationalization and Dividend Upside: Capital Reduction and Asset-Light Focus

One of the biggest rerating catalysts for Velesto is its proposed capital reduction exercise. Subject to shareholder approval, this move will transfer RM1.2 billion of paid-up capital to retained earnings, transforming a RM82 million debit balance into a RM1.1 billion credit. This gives Velesto the flexibility to pay dividends above its annual earnings per share under Companies Act rules.

With rig-related debts fully paid off, no special periodic surveys (SPS) due in FY26-27F, and only one SPS in FY28F, Velesto is positioned to reward shareholders generously. The forecasted dividend per share (DPS) for FY25-27F is raised to 2.5 sen, more than double the FY24 payout and sharply higher than previous estimates. This translates to a dividend yield of 15% per annum at current prices.

Velesto’s strategic pivot away from capex-intensive expansion towards asset-light initiatives further supports its high payout strategy, freeing up capital for consistent dividends.

Operational Outlook: Utilization and Charter Rates

• 2Q25: Utilization rate expected to fall further to 56% as Naga 8 completes its contract in April 2025.
• 2H25: Utilization is projected to recover to 78% in 3Q25 and 83% in 4Q25 with new contracts for Naga 5 (PTTEP Malaysia) and Naga 8 (Petronas Indonesia) starting July 2025.
• Daily Charter Rates: Average DCR likely to soften below US\$120,000/day in 2H25F (from US\$127,000/day in 1H25F), with Naga 5 at ~US\$110,000/day and Naga 8 at ~US\$95,000/day.

Despite these softer rates, Velesto’s active overhead management is expected to cushion the earnings impact.

Financial Summary and Key Forecasts

Earnings Revisions and Consensus Comparison

CGS International has raised Velesto’s FY25F core EPS forecast by 49%, reflecting higher rig utilization (71% vs. previous 70%), lower overheads, and reduced depreciation. FY26-27F core EPS forecasts were also increased by 39-48% due to the same cost rationalization and lower depreciation, with utilization assumptions for those years maintained at 75%.

The company’s payout ratio is forecast to exceed 100% for the period FY25-27F, as Velesto leverages its strengthened balance sheet to prioritize shareholder returns.

Contract Wins and Utilization Guidance

• Naga 4: Secured a contract with Phu Quoc Petroleum Operating Company (Vietnam) to drill 40 wells, starting late April or early May 2026 for over a year. Estimated DCR: US\$111,000/day.
• Naga 8: Awarded a contract by Petronas Indonesia for 12 firm wells and 3 optional wells, commencing July 2025 to February 2026, with a break before resuming mid-2026 for over two more years. Estimated DCR: US\$95,000/day.
• Naga 5: Expected to win a contract with PTTEP Malaysia for one year (plus 9-month option), starting July 2025. Estimated DCR: US\$110,000/day.

Total contracted days and utilization rates are detailed in the company’s disclosures, with utilization expected to rise in the second half of 2025 as these contracts commence.

Global Jack-Up Rig (JU) Market Trends

The global JU rig market has seen a decline in demand and utilization since the 2023-2024 peak. While average DCRs have not yet softened materially, they are expected to come under pressure as older contracts roll over. In Southeast Asia, utilization has dropped from 97.8% in 2023 to 80.6% in the first five months of 2025. Velesto notes that regional DCRs have softened to US\$90,000-110,000/day in 1H25F, down from US\$110,000-130,000/day in 1H24.

Other regional JU rig markets show:

• Middle East: Demand and utilization have softened, causing rigs to migrate to Southeast Asia.
• Indian Subcontinent: Weak demand, with recent tenders as low as US\$35,000/day (vs. previous US\$65,000-70,000/day).
• Far East Asia: Stable demand.
• West Africa: Increasing demand, but the market is too small to impact global dynamics significantly.

ESG and Sustainability Initiatives

Velesto has committed to a 10% reduction in emissions intensity per operating day and a 30% reduction per ringgit of revenue by 2030, relative to a 2021 baseline. These goals were already achieved by 2022, due in part to a low-utilization base year. The company is targeting net-zero carbon by 2050 and will disclose its pathways by the end of 2024.

Emissions data:

• 2022: Scope 1 emissions at 54,936 tCO2e (+3.6% YoY), Scope 2 at 452 tCO2e
• 2023: Scope 1 emissions at 63,469 tCO2e (+15.5% YoY), Scope 2 at 477 tCO2e
• Scope 1 and 2 emissions per operating day fell 17% YoY in 2023
• Scope 3 (business travel): 33 tCO2e in 2022, rising to 66 tCO2e in 2023

The company uses solar panels at its bases, energy-efficient lighting, and advanced rig power management systems. Most emissions are from rig diesel consumption, with ongoing efforts for efficiency.

Velesto’s JU rigs have an estimated useful life extending to the 2040s, mitigating concerns about asset obsolescence in the energy transition era.

Sector Comparison: How Velesto Stacks Up

Conclusion: Velesto Positioned for High-Yield Growth

Velesto Energy Berhad is emerging as a high-yield, cost-efficient play in the Malaysian oil & gas services market. With a sharply improved balance sheet, a dividend yield forecast among the highest in the sector, and an asset-light strategy, Velesto provides a compelling combination of stability and income for investors. Risks remain, particularly from potential oil price corrections and their effect on drilling activity and DCRs, but Velesto’s nimble cost management and dividend flexibility offer strong support for its investment case.

The company’s disciplined focus on operational efficiency, prudent capital management, and ESG progress further enhance its profile as a top pick among regional energy services providers.