• Hibiscus revealed that its latest asset will add 20.6m bbls of 2P oil reserves and doubles its oil production to 18,500 bpd.

• With expected gas production of 8,000 boepd and reserves of 14MMboe, the asset allows the company to diversify its asset portfolio as part of its energy transition strategy.

• The purchase price of USD212.5m implies acquisition cost of c.USD6.2/boe. Management will seek to raise additional RM200m from equity offering to settle the sum amount.

• We raise our FY22F/FY23F earnings by 35%/191% to account for this asset, assuming SPA completion by 2QFY22F.

• Reiterate BUY on Hibiscus with unchanged TP of RM1.20 based on 1.3x FY22F P/B. No change to our TP as we had already ascribed asset premium in our valuation.

Fair price, we think

Hibiscus revealed that Repsol’s assets contain 20.6m bbls of 2P oil reserves and 83Bscf 2P gas reserves, totalling 2P hydrocarbon reserves of 34.5m bbls of oil equivalent (boe). Based on purchase consideration of USD212.5m, this implies acquisition cost of USD6.2/boe. While this is slightly above our initial expectation, we think this is fair given the rising oil price environment. The 2C resources number, however, have yet to be finalised.

Source of funding

On top of previous remaining RCPS proceeds c.RM197m, management expects that it will require to raise additional RM200m from private placement of RCPS and borrowings (if required) to settle the purchase consideration during SPA completion. This includes the estimated net cash balance available to the company at SPA completion amounted to c.RM200m. Subsequently, there is RM1.6bn RCPS remaining to be issued for future acquisitions.

Work commitments

Following the SPA completion, the company is required to undertake at least 3 drilling projects including 1 exploration and 2 developments at Kinabalu PSC and PM3 CAA areas. The total expected capex for these projects amounted to USD110m which will be funded through cash flows from the asset.

Raise earnings forecast

Upon completion of the transaction, this asset will double its oil production to 18,500 bpd and boost its 2P oil reserves by c.50% to 67mbbls. Besides that, it will also diversify its earnings base into gas with expected production of 47MMScf/day (8,000 boepd) and total 2P reserves of 82BScf (14MMboe). We raise our FY22/FY23F earnings forecast by 35%/191% (Table 1) to account for this asset, assuming SPA completion by 2QFY22 and oil price assumption of USD60/bbl.

Source: BIMB Securities Research - 8 Jun 2021

Last week’s highlights

• Ministry of Finance Malaysia (MOF) had released its 55th LAKSANA report last week.

• Producer Price Index (PPI) local production surged higher by 10.6% in April 2021

• Malaysian government unveiled an additional stimulus (PEMERKASA+) worth RM40bn

• The FBM KLCI dropped by 1.0% or 15.99 points for the week to settle at 1,578.45 points

• US unemployment rate edged down to 5.8% in May

• Euro area unemployment rate lowered to 8.0% in April 2021

• Australis’s gross domestic product (GDP) rose 1.8% in 1Q21

• Singapore's retail sales surged 54% yoy in April 2021

• Central banks of Australia and India kept the interest rates unchanged.

MALAYSIA ECONOMY

• According to the Ministry of Finance Malaysia (MOF) 55th LAKSANA report, under PENJANA SMEs Financing, a total of RM1.403bn was approved to 7,497 applicants. For the technical and digitalization initiatives, RM66.2m has been distributed to 13,866 applicants under the fund. As of reporting date, a total of RM722.97m had been channeled based on 2,028,639 claims to the front liners as allowance. The disbursed amount of wage subsidy 1.0 and 2.0 schemes stood at RM12.889bn and RM1.193bn, respectively.

• The Producer Price Index (PPI) local production surged higher by 10.6% in April 2021, accelerated from 6.7% growth in the previous month. The increase was the highest since February 2017 (10.8%). The sharp rise was mainly due to a low base effect and continued rise in commodity and raw material prices due to the recovery in global demand and various supply constraints. The growth was driven by the increase in all sub-indexes excluded the electrical & gas supply index: the mining index (92.4%); agriculture, forestry & fishing index (49.8%); manufacturing index (3.5%); water supply (1.2%). Meanwhile, PPI by stage processing, the index of crude materials for further processing surged from 31.8% to 55.8% in April 2021. The index of Intermediate materials, supplies & components also increased by 4.8%. However, the finished goods deflation deepened to -0.7% from -0.2 in March.

• On 31 May 2021, the Malaysian government unveiled an additional stimulus (PEMERKASA+) worth RM40bn with RM5bn as direct fiscal injection. This stimulus was introduced to support the economy during the second lockdown in June 2021. The stimulus unveiled three main objectives: improving public healthcare capacity, continuing the rakyat welfare agenda, and supporting business continuity.

• Moody’s Investors Service kept Malaysia’s A3 stable credit profile supported by its diversified, competitive and moderately large economy, ample natural resources and strong medium-term growth prospects. Malaysia’s credit profile also reflects “a1” for economic strength, “a2” for institutions and governance strength, “ba2” for fiscal strength and “baa” for susceptibility to event risk.

Source: BIMB Securities Research - 8 Jun 2021

• US non-farm payrolls grew 559,000 in May

• Unemployment rate ticked lower to 5.8%

• Wage growth increased 0.5% mom, 2.0% yoy

• Labor force participation edged down to 61.6%

• NFP shows economy nowhere near substantial progress

Hiring picked up in May after a disappointing April, as nonfarm payrolls rose 559,000 jobs. Still, that was below market expectations for around 670,000. Meanwhile, the change in total nonfarm payroll employment for March was revised up by 15,000, from 770,000 to 785,000, and the change for April was revised up by 12,000, from 266,000 to 278,000. With these revisions, employment in March and April combined is 27,000 higher than previously reported.

Once again, leisure and hospitality led the way on job gains, adding 292,000 positions. Two thirds of those jobs were in restaurants and bars, which added back 187,000 workers. Leisure and hospitality employment is still down 15%, or 2.5 million jobs, versus pre-pandemic levels. Hiring was also up in local government education (+53,000), state government education (+50,000) and private education (+41,000), reflecting the resumption of in-person learning. Health care and social assistance also had decent job growth (+46,000) in May, with a big jump up in employment in child care services (+18,000). On the goods side of the economy, manufacturing employment rose 23,000 in May. However, construction shed 20,000 positions, driven by non-residential specialty trade contractors (-17,000). Retail trade also shed workers for the second consecutive month (-6,000), as food and beverage stores reduced staffing for the third consecutive month.

The unemployment rate fell to 5.8%, from 6.1% in April. The drop in the unemployment rate was driven by a smaller 444,000 gain in household employment, but the labor force fell slightly (-53,000). Therefore, labor force participation edged down 0.1 percentage points to 61.6% in May, and has made little improvement since June 2020.

Source: BIMB Securities Research - 8 Jun 2021

• Hibiscus is taking over Repsol’s Malaysian assets and 1 production block in Vietnam for USD212.5m.

• We are positive with this acquisition and we view the purchase price as attractive given current relatively higher oil price environment.

• We expect this asset to more than double its 2P reserves and production. Nonetheless, we made no change to our earnings forecast pending more details from the company.

• Reiterate BUY on Hibiscus with unchanged TP of RM1.20. We think this is fair given potential earnings contribution from the acquisition of this asset. Hibiscus will resume trading tentatively on Tuesday 8 June.

Acquiring producing assets from Repsol

Hibiscus entered into conditional SPA with Repsol to purchase the latter’s Malaysian E&P assets (Table 1) and Block 46 CN in Vietnam for USD212.5m. To recap, it previously launched an RM2bn fundraising as part of its acquisition drive to acquire up to 3 producing assets in SEA.

Positive on the acquisition

While details are scarce, we are positive with this acquisition as the company is delivering on its promise to acquire producing assets. It has paid USD7.5m (will be funded via a portion of recent RM203m RCPS proceeds) for deposit and it expects to complete the acquisition this year. Once the purchase is completed, we believe this will enhance its profile as a capable and prominent E&P player hence opening up opportunities to acquire larger assets including Exxon’s Malaysian asset.

Attractive price, we think

Based on our estimate, these assets have a combined 2P oil reserves of 80 million barrels of oil equivalent (MMboe), implying potential acquisition cost of USD2.7/bbl. Although this is slightly higher than its previous acquisitions of producing assets (Table 2), we think that it is still attractive given current higher oil price environment. Besides that, the price tag also falls near the lower end of price range estimate between USD200m to USD400m provided by oil consultancy firms such as Rystad Energy and IHS Markit.

Shall boost 2P reserves to more than 100MMbbls

At this juncture, we maintain our earnings forecast pending more details from the company. Upon completion of the transaction, we expect this asset to more than double its 2P reserves to 126MMbbls (from 46MMbbls) while raising its production to more than 20,000 boepd (from 9,000 bpd).

Source: BIMB Securities Research - 3 Jun 2021

• Overall, 1Q21 earnings released by companies under our coverage was impressive with three coming in above our expectations, six within and one below expectations.

• Narrowing of price differential between CPO and SBO in CBOT is inconsequential, due to anticipation of tight supply of global vegetable oils, led by PO from Malaysia as well as improved demand from China that could dictate higher CPO prices, possibly up until July 2021.

• We see potential upside to plantations’ segment margins in the upcoming 2Q21 earnings season, given higher ASP of palm products and more realistic production expectation.

• We upgrade our sector call to OVERWEIGHT from NEUTRAL as rise in earnings and high CPO prices have resulted in several stocks carrying attractive valuations. Maintain unchanged average CPO price forecast of RM2,950/MT for 2021 and RM2,700/MT for 2022.

Performance was impressive

The recently concluded corporate earnings season was spectacular for plantation companies, in our opinion. Out of 10 stocks under our coverage, 3 companies reported earnings that were above expectations, with 6 inline and 1 came in below our expectation. Earnings were generally higher yoy resulting from greater ASP of palm products and improvement in FFB production. Expansion in margins and profit contribution from downstream manufacturing segment, especially from oleochemical division aided to the better results for KLK and IOI. Conversely, FGV’s weaker performance, apart from higher FV charged on LLA, was due to RM65m losses incurred from the processing of external crops as opposed to RM48m gain a year ago – causing a negative milling margin.

Tight supply set to keep CPO price supported

We are of the view that the higher near-term CPO price is possible. Although any price increase could be capped by the narrowing of the price differential between CPO and SBO in CBOT, we believe this is inconsequential. The anticipation of tight supply of global vegetable oils, as well as improved demand from China means CPO price could retain its upward trajectory, possibly up until July 2021. This is in tandem with our view on tight palm oil supply scenario in Malaysia given unresolved labour shortage issues and recent Malaysian government’s decision to impose a stricter implementation of Movement of Order Control (MCO) on agribusiness. The MCO is limiting workforce capacity in palm oil mills and refineries to 60% in a bid to curb the spread of COVID-19 and likely hurt palm oil production this year by delaying the harvesting and collecting of FFB. Hence, this will in turn impact productivity and the quality of CPO produced. In light of these developments, we foresee that price for June/July 2021 would trade within a range of RM4,100/MT and RM3,800/MT as opposed to RM2,366/MT and RM2,795/MT during the same period last year.

Earnings outlook remains exciting

We expect plantation’s earnings for this year would be more visible given average CPO price achieved up to May 2021 averaging RM4,095/MT vs. RM2,496/MT for the same period last year. The higher realized price in 2021/22 against 2020 should see plantation segment fetching better margins in FY21 and FY22. Nonetheless, we remain cautious that earnings could be affected by high operational costs and possible lower than-expected production and sales volume – with labour issue remaining as a key concern when the sector enters high production season in Sep-Nov. On the other hand, there might be margin contraction for downstream players as demand and price (feedstock and selling price) concerns heighten. However, we estimate that higher revenue and better margins expected from oleochemical division, would partially cushion earnings volatility in downstream segment.

OVERWEIGHT the sector

We maintain average CPO forecast for 2021 of RM2,950/MT and RM2,700/MT for 2022. Our base case scenario is for CPO prices to continue their upward trajectory in the short-term – due to tighter supplies and improved demand as discussed earlier – and then moderate in the later part of 3Q21. In view of this, we expect plantation companies’ earnings to remain firmly on an uptrend, particularly for 2Q21.

Following the impressive 1Q21 corporate earnings season, we upgrade our call on plantation sector to OVERWEIGHT from NEUTRAL as most stocks under coverage are currently carrying attractive valuations. We have BUY call on HAPL (RM2.17), SOP (RM4.50), IOI (RM4.80), KLK (RM24.40) and SIME Darby Plants (TP: RM5.00), whilst HOLD recommendation on Sarawak Plant (RM2.64), TSH (TP: RM1.23), GENP (TP: RM9.00) and FGV (TP: RM1.30); and non-rated for TH Plant.

Variances in earnings forecast would be due to lower-than-expected production, lower-than-expected ASP realised of palm products and higher-than-expected costs. Risk factors include 1) lower-than expected demand, 2) weakening of crude oil prices, and 3) unforeseen market changes i.e., prolong Covid-19 pandemic and movement restrictions.

Source: BIMB Securities Research - 3 Jun 2021

• Malaysia manufacturing performance in May dampened by surge in COVID-19 infections

• The global manufacturing sector expanded at a robust pace in May

• Global manufacturing activity racing but supply squeeze dims outlook

Malaysia manufacturing performance in May dampened by surge in COVID-19 infections

The headline IHS Markit Malaysia Manufacturing PMI eased to 51.3 in May 2021 from a record high 53.9 in April. The latest reading signalled a further improvement in the health of the sector, and the first time back-to-back monthly improvements that have been reported since mid-2018.

Businesses signalled that the recovery in the Malaysian manufacturing sector continued in May. New order inflows rose for the second month in a row during May as manufacturers commonly reported strong local demand for goods. That said, the pace of the expansion eased from April as the latest restrictions dampened client confidence. However, stricter measures to combat a renewed surge in COVID-19 infections had an adverse impact on production volumes, which moderated following a solid expansion in April. At the same time, new export orders lost momentum in May as COVID-19 related disruptions in international markets intensified as infections rose in many countries. Malaysian manufacturers reported that employment fell slightly for the second month in a row in May as businesses indicated lower production requirements. Goods producers continued to report significant supply chain delays during May. Supplier delivery times lengthened at a sharp pace once again as restrictions to combat COVID-19 both in Malaysia and key external markets were tightened. Difficulties in sourcing and receiving raw materials contributed to a further sharp rise in raw material prices. As a result, input costs rose for the twelfth time in as many months in May. Factory gate prices also increased in the latest survey period, as firms partially passed higher costs to clients. Uncertainty about the speed of the economic recovery from the pandemic dampened overall sentiment among manufacturers, though firms remained optimistic on balance that output would increase over the coming 12 months

Outlook. Malaysia manufacturing PMI eased from a record high 53.9 in April to 51.3 in May. However, the impact of the latest tightening of restrictions is yet to feed through to official statistics, though the latest PMI data suggest that the sector has stagnated during May. Despite the easing of growth in May, the PMI continues to suggest that 2Q21 will see the strongest manufacturing upturn since the survey began in 2012, but the concern is that the virus could continue to weaken growth in coming months. So far, Malaysia's burgeoning trade performance has been a bright spot. Exports surged 63.0% yoy, whilst imports grew 24.4% yoy. An increase in intermediate goods and capital goods is a welcome sign that Malaysia is ramping up manufacturing production for exports. The gradual unwinding of pandemic restrictions around the world has led to an upturn in manufacturing and trade activity. Nevertheless, the reimposition of tighter domestic restrictions from 1 to 14 June is a temporary setback to the economy. However, we expect the export-oriented sector to rebound faster post-phase 1 of the MCO given that the global demand for Malaysia’s key export products and trading partners remains fairly strong. We continue to expect higher trade growth in the near term, mainly due to the low base effect in 2020, along with continued demand from major trading partners on the back of their economic recovery. Nonetheless, we are also cautious as the recent COVID-19 resurgence both domestically and regionally may disrupt the manufacturing activities and supply chain due to the movement restriction imposed to contain the spread of the virus. Future growth expectations took a knock in May, as the renewed wave of infections served as a reminder that the virus remains a significant risk to the outlook.

The global manufacturing sector expanded at a robust pace in May

The global manufacturing sector expanded at a robust pace in May. Production rose at one of the fastest rates in a decade, as new order growth accelerated to an 11-year high. The J.P. Morgan Global Manufacturing PMI posted 56.0 in May, up from 55.9 in April, to register its highest level in over 11 years (April 2010). Solid improvements in business conditions were seen across the consumer, intermediate and investment goods sectors. Pressure on capacity continued to build during May. Average vendor lead times lengthened to the greatest extent in the survey history, while backlogs of work at manufacturers rose at a near survey-record pace. This fed through to increased inflation, as highlighted by the steepest rise in input costs for over a decade and record inflation of selling prices. Delays in the receipt of goods ordered from suppliers combined with higher production needs encouraged manufacturers to raise purchasing levels in May. Buying activity expanded for the tenth month in a row and to the second-greatest extent on record. This led to a slight gain in pre-production stocks for a second successive month. In contrast, finished goods inventories fell further. The outlook remained positive, with manufacturers forecasting further increases in output over the next 12 months.

Source: BIMB Securities Research - 2 Jun 2021