Investment Highlights

• We initiate our coverage of Hibiscus Petroleum (Hibiscus) with a BUY at a sum-of-parts-based fair value of RM0.79/share, offering a compelling upside potential of 36%. This implies an enterprise value/proven and probable reserves (2P) valuation of US$6.10/barrel – at discounts of 26% to EnQuest’s US$8.30/barrel and 45% to regional average of US$11.20/barrel.

• Hibiscus’ current 2P net reserves of 46.1mil barrels in North Sabah and the UK account for half of Sapura Energy-OMV’s largely gas-based 92.3mil barrels of oil equivalents. However, in terms of oil reserves, Hibiscus’ 2P reserves is 7.7x SapuraOMV’s 6.2mil barrels.

• The group’s plan to raise daily production from 9K barrels currently to 12K by 2021 has been deferred by 2 years due to the Covid-19 pandemic and current low oil demand environment. Additionally, Dagang NexChange’s acquisition of the remaining 60% stake in Ping Petroleum has re-prioritised Hibiscus towards its newly secured 70% interest in the Teal West field instead of the earlier Guillemot debottlenecking plan at the group’s 50%-owned Anasuria cluster in the UK.

• Based on an average crude oil price of US$50/barrel for FY21F and US$55/barrel for FY22F–FY23F vs. US$58/barrel in FY20, we are projecting the group’s core net profit to decrease by 11% in FY21F, and then organically increasing by 12% in FY22F.

• The sharper FY23F earning growth of 28% stems from an increase in Anasuria’s daily production by 2.2x by the end of 2022, driven by Teal West’s maiden output. Thereafter, Hibiscus’ FY24F earnings is expected to double from a 32% increase in daily production, underpinned by a full-year contribution from Anasuria’s output expansion together with a 40% increase from North Sabah.

• Hibiscus plans to utilise the initial tranche of RM204mil Islamic convertible redeemable preference shares (CRPS) as the earnest deposit for the acquisition of Southeast Asian assets on offer from oil majors’ divestment programme. Assuming a conversion price of RM0.66 for the remaining RM1.8bil CRPS to be issued, we estimate that the prospective asset would need to generate a minimum IRR of 15% vs. management’s threshold of 12% to mitigate any value dilution.

• Even so, based on enterprise value for the group’s existing 2P reserves, Hibiscus is currently only trading at US$4.80/barrel – a steep discount of 42% below its closest peer, UK-listed EnQuest and 60% below regional average. This is compelling given the group’s project-funded productivity enhancement programmes amid a more optimistic crude oil price environment. Additionally, Hibiscus is listed in the FTSE4Good Bursa Malaysia Index with the highest 4-star environmental, social and governance (ESG) rating, which ranks amongst the top 25% in the FBM Emas Index.

Source: AmInvest Research - 5 Feb 2021