Investment Highlights

• We maintain our BUY recommendation on Hibiscus Petroleum (Hibiscus) with a sum-of-parts-based fair value of RM0.79/share, which implies an enterprise value/proven and probable reserves (2P) valuation of US$6.10/barrel. This is at discounts of 32% to EnQuest's US$9/barrel and 48% to regional average of US$11.80/barrel. Our valuation is unchanged even though we have reduced FY21F–FY22F earnings by 7% due to higher non-cash amortization and decommissioning assumptions for the group’s 50%-owned Anasuria concession.

• Hibiscus’ 1HFY21 core net profit of RM25mil (-67% YoY) was below expectations, accounting for 38% of our earlier FY21F earnings and 41% of consensus, vs 46%-47% over the past 2 years. This was mainly due to a RM16mil increase in amortisation charge for intangibles and RM4mil provision increment for decommissioning costs in 2QFY21 for the Anasuria cluster, which we understand will be mostly recurring going forward.

• However, management has declared the group’s maiden dividend with a first interim 0.5 sen although 1HFY21 weighted average crude oil price dropped 40% YoY to US$40/barrel. As Brent crude oil price is currently higher above US$60/barrel, we have incorporated FY21F–FY23F DPS of 1 sen.

• QoQ, the group’s 4QFY21 revenue rose 31% due to an additional shipment from its 50%-owned North Sabah production sharing contract which drove this segment’s sales by 47% to 871K barrels amid flattish crude oil price.

• However, the higher amortisation and decommissioning costs together with a RM18mil lumpy scale squeeze operation at the Guillemot field’s GUA-P3 well led to Anasuria’s loss of RM16mil. Hence, the group’s pretax profit halved QoQ to RM8mil while a positive tax charge of RM4mil supported Hibiscus’ core net profit increase of 8% QoQ to RM13mil.

• Hibiscus is reviewing the development sequence of either its recently acquired 70% interest in the Teal West field or its 50% equity stake in Block 15/13a of the Marigold and Block 15/13b of the Sunflower concessions, which was acquired for US$37.5mil cash from India-based rig operator Aban Offshore’s wholly-owned Caldera Petroleum in October 2018.

• Even so, based on the enterprise value for the group’s existing 2P reserves, Hibiscus is currently only trading at US$5.85/barrel – at a discount of 35% to its closest peer, UKlisted EnQuest and half of regional average (Exhibit 6). This is compelling given the 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 - 23 Feb 2021