KUALA LUMPUR: Velesto Energy Bhd's net profit is set to improve in the financial year 2025 (FY25) and FY26 on the back of lower operating expenditure (opex), said Kenanga Investment Bank Bhd (Kenanga Research).
The research house has raised its earnings forecasts by 16 to 18 per cent for the two financial years, after adjusting for sustainable cost cuts.
Kenanga said sustained cost efficiency and strong cash flow generation could enable the company to pay out dividends exceeding 100 per cent of its profit.
Following the revision, it raised Velesto's target price to 25 sen from 18 sen, based on a higher price-to-book value of 0.7 times compared with 0.5 times previously, while maintaining a "Market Perform" call on the counter.
Kenanga Research said Velesto's opex is expected to remain stable following rationalisation measures implemented in late FY24, contrary to earlier assumptions of a cost rebound.
"Velesto's lower opex is more sustainable than we had earlier thought as its overhead cost was 54 per cent lower in FY25 and is not showing any signs of rebound.
"That aside, labour cost was also rationalised at the end of FY24, down 10 pe cent year-on-year, and the company has not shown any intention of ramping up its labour costs in the foreseeable future," it added.
The firm said Velesto does not plan to ramp up spending in the near term, with no major capital expenditure (capex) in FY25 and FY26 aside from the remaining special periodic surveys.
"For FY26, we expect capex to be at RM90 million for maintenance of its assets with no further special periodical survey programme to be executed.
"Therefore, the group has up to RM280 million cash to be paid out as dividends after tax to shareholders while still keeping a net cash position of RM81.9 million in FY26," it said.
Kenanga Research highlighted Velesto's strong balance sheet and improving cash flow as key enablers for a more generous dividend policy.
The company is projected to pay a dividend per share of three sen in FY26, implying a yield of about 12 per cent.
Post-capital reduction, Velesto's retained earnings are expected to rise to about RM1 billion from a deficit of RM135 million previously, providing ample room for dividend payouts above profit after tax.
The firm said Velesto can sustain a dividend payout ratio of around 140 per cent in FY26, supported by earnings before interest, taxes, depreciation and amortisation of RM420 million annually and minimal capex requirements.
Operationally, Velesto's rig utilisation is expected to remain robust in FY26, with three rigs, namely Naga 4, 5 and 8, already secured under existing contracts for most of the year.
Negotiations are ongoing for Naga 6, while Naga 2 and 3 are expected to enter bids soon.
Kenanga Research said demand for jack-up rigs remains solid regionally, although daily charter rates are projected to moderate to around US$100,000 (RM422,300) per day from US$130,000 (RM548,990) in 2024.
However, it cautioned that a subdued Brent crude outlook and a soft upstream activity environment could cap upside potential in the near term.