Investment Highlights

• We reiterate BUY on Hibiscus Petroleum (Hibiscus) with a lower sum-of-parts-based fair value of RM1.30/share (from RM1.42/share previously), which also reflects a premium of 3% for an unchanged ESG rating of 4 stars.

• It also implies an enterprise value (EV)/proven and probable reserves (2P) valuation of US$7.42/barrel, at a discount of 45% to EnQuest's US$13.5/barrel and 50% to the regional average of US$15.0/barrel (Exhibit 4).

• Hibiscus, in its latest corporate business update, announced that the company will pay the outstanding Sabah’s state sales tax (SST) amounting to RM85.7mil to the state government. This also means that the group will effectively be charged the SST of 5% on oil revenue generated from its 50%-owned North Sabah profit sharing contract (PSC) and 60%-owned Kinabalu PSC.

• Subsequently, we cut FY23F–FY25F earnings by 6-7% mainly to account for the imposition of SST.

• To recap, Sabah’s Finance Minister II Datuk Masidi Manjun previously warned that the Sabah state government will be terminating workers’ permits for Hibiscus’ 2 companies operating in the state involving its 50%-owned North Sabah profit sharing contract (PSC) and 60%-owned Kinabalu PSC if the group does not settle outstanding SST payments within the stipulated deadline.

• Despite the negative earnings impact from paying the SST, we deem Hibiscus’ decision reasonable as it avoids further escalation of the conflict which could lead to indeterminate operation disruptions.

• Separately, the group also declared a final single-tier dividend of 1.0 sen, bringing FY22 total dividend to 3 sen (+6x YoY). This also represents a slightly higher dividend payout ratio of 10%, compared to 8% in FY21. The group also proposed an RM800mil capital reduction which will not have any impact on our EPS projections nor fair value.

• Going forward, Hibiscus remains ambitious in growing its asset portfolio with a combination of organic and inorganic growth strategies. The group also targets to achieve FY23F sales of 7.2–7.5mil barrels of oil, condensate and gas (+57- 63% YoY) via the recent acquisition of Repsol’s assets and production enhancement strategies.

• Currently, Hibiscus is trading at an unjustified EV/2P reserve of US$4.60/barrel, at a discount of 66% to its closest peer, UK-listed EnQuest, and 69% to the regional average (Exhibit 4).

Source: AmInvest Research - 5 Oct 2022