Investment Highlights

• We maintain our BUY recommendation on Hibiscus Petroleum (Hibiscus) with a higher sum-of-parts-based fair value of RM1.30/share (from an earlier RM1.18/share), which also reflects a premium of 3% from our ESG rating of 4 stars.

• It also implies an enterprise value (EV)/proven and probable reserves (2P) valuation of US$7.10/barrel, half of EnQuest's US$13/barrel and at a 57% discount to the regional average of US$16/barrel.

• Given that crude oil prices are currently trading above US$90/barrel, our higher valuation stems from an earnings increase of 7% for FY22F and 32% for FY23F. We have raised FY22F crude oil price by US$5/barrel to US$80/barrel together with FY22F–FY23F weighted average crude oil price by 26% to US$54/barrel for the group’s new Repsol assets which commenced contribution from 25 January this year.

• However, we have largely maintained FY24F earnings with an unchanged oil price of US$60/barrel thereafter on expectations of a normalisation in global supply-demand dynamics. Recall that the recently announced prosperity tax in 2022 will not have any substantive impact on Hibiscus’s Petroleum income tax rate of 38%.

• We view Hibiscus’ 1HFY22 net profit of RM91mil (+3.7x YoY) as above expectations mainly due to higher realized crude oil prices. Excluding any earnings projections from the completed Repsol acquisition in 2HFY22, we estimate that the results accounted for 41% of our earlier FY22F net profit of RM251mil. We also maintain our dividend forecasts for now as the 1HFY22 DPS of 1 sen (2x YoY) appears ambitious against the backdrop of the Repsol purchase.

• On a QoQ comparison, 2QFY22 revenue rose 15% QoQ largely from an 11% increase in total sales volume to 844K barrels, amid flattish realised oil price. While this included an optional sale of an overlift volume of 90K barrels from the Cook field at the Anasuria cluster in Dec 2021, the impact to earnings was neutral given the reimbursement to main JV partner Ithaca Energy in the subsequent quarter.

• Excluding the overlift volume, we estimate 50%-owned Anasuria concession’s North Sea sales declined by 13% to 166K in 2QFY22 due to the continued subsea riser malfunction which is only expected to be rectified in 3QCY22. However, North Sabah, which accounted for 75% of 1HFY22 net profit, registered a 12% QoQ increase in 2QFY22 daily production to 5.9k barrels with the relaxation of Covid-19 measures, driving down opex by 32% QoQ to RM13/barrel.

• Slightly dampened by a 1%-point QoQ increase in 2QFY22 effective tax rate of 45%, Hibiscus’ 2QFY22 core net profit (excluding unrealised forex loss) rose 19% QoQ to RM50mil.

• We remain positive on the upcoming contribution of Repsol assets which will double the group’s daily production to 18.5K boe and increase its 2P reserves by 72% to 81mil boe. Based on the EV for the group’s expanded 2P reserves, Hibiscus is currently trading at only US$5.86/barrel, at an unjustified discount of 55% to its closest peer, UK-listed EnQuest and 64% of regional average (Exhibit 3).

Source: AmInvest Research - 18 Feb 2022