PVD – FY21F net profit recovery largely priced in – Update

• We expect PVDrilling’s net profit to increase 19% in FY21F and 136% in FY22F as the TAD rig resumes working from Jul 2021.
• Reiterate Hold at a higher TP of VND13,400, on a downward revision in risk free rate from 4% to 3% and roll forward of DCF valuation to 2021.

11M20 revenue fulfills full-year guidance

According to PVDrilling (PVD), the majority of its subsidiaries and affiliates had by end-Nov already achieved their full-year guidance, generating an estimated consolidated revenue of VND5,400bn (~US$231.8m, +23.6% yoy), equivalent to 115.4% of PVD’s 2020F guidance and 104.3% of our revenue forecast. The growth in the topline could be credited to additional revenue from three leased rigs and higher jack-up charter rate of 7-9% yoy, which more than offset a lower average utilisation rate (73% vs. 2019’s 90%). However, we estimate PVD to post a 13% decline in FY20F net profit, mainly due to a 2.8% pts contraction in gross margin as a result of additional expenses incurred in response to the Covid-19 restrictions.

FY21F net profit expected to recover on the resumption of TAD rig

We expect the company’s average jack-up utilisation rate to improve to 80.0% in 2021F in the best-case scenario, with various job opportunities in the domestic market, such as Te Giac Trang field development, Ken Bau appraisal, drilling programmes of Hoang Long JOC, Cuu Long JOC, JVPC, etc. We forecast net revenue to fall 9.0% yoy on a slightly lower average day rate (US$60,000), but positive net profit growth of 19% yoy would be primarily driven by the resumption of the tender assist drilling (TAD) rig from Jul 2021F, which would generate lower losses than the cold-stacked 2017-19 period.

Reiterate Hold with a higher TP of VND13,400

We see no significant changes in PVD’s core business from our last update in Nov and therefore make no changes to our FY20-22F EPS forecasts. However, we use a new WACC of 13.5% for our DCF valuation (from 15.6% previously), on the back of (1) lower risk free rate at 3% (from 4% earlier), and (2) lower beta of 1.5x (from 1.6x earlier), using Bloomberg’s 2-yr beta. We also roll our DCF valuation to 2021 and apply the unchanged target P/BV of 0.4x on FY21-23F EPS. These adjustments result in a higher TP of VND13,400. We maintain a Hold rating, as we believe the recent stock price rally has largely priced in an FY21F net profit rebound and support from the oil price recovery.
Upside and downside risks
Upside risks are faster-than-expected recovery in drilling sector and quick debt collection. Downside risks include higher operating costs and low oil prices.

Please follow this link for the full report