Investment Highlights

• We maintain BUY on Hibiscus Petroleum (Hibiscus) with a  lower sum-of-parts-based fair value of RM1.29/share (from  RM1.40/share previously) after lowering our daily production rate and realised oil price assumptions. Our fair value  includes a premium of 3% for an ESG rating of 4 stars.

• This also implies an enterprise value (EV)/proven and  probable reserve (2P) valuation of US$7.82/barrel, at a  discount of 34% to the regional average of US$11.90/barrel. 

• Hibiscus’ 9MFY23 core net profit (CNP) of RM355mil  underperformed, coming in at 62% of our FY23F earnings and  70% of consensus’. Therefore, we trimmed our FY23F/FY24F  earnings by 22%/23% upon lowering our daily production rate  and average realised oil price assumptions. 

• The group also declared an interim dividend of 0.75sen/share,  bringing the 9MFY23 total dividend to 1.5 sen/share – which  represents a dividend payout ratio of 11%. 

• YoY, 9MFY23 revenue more than doubled (+2.2x YoY) to  RM1.8bil anchored by higher contribution from Hibiscus  Peninsular (also known as Repsol assets) coupled with  higher crude oil sales volume and average realised oil price.  As a result of the higher revenue, 9MFY23 net profit also  surged by +2.9x YoY despite being partially dragged by lower  profit margins and a higher effective tax rate.

• QoQ, 3QFY23 revenue dropped by 27% as a result of slightly  lower volume of oil and condensate sold and lower average  realised selling prices. North Sabah’s sales volume fell 44%  QoQ with only 1 offtake, compared to 2 offtakes in 2QFY23.  This was mitigated by higher sales volume from Kinabalu Oil  (+9% QoQ), PM3 CAA (+21% QoQ), and Anasuria (+7% QoQ).

• Notably, PM3 CAA recorded higher revenue by 26% QoQ  despite lower average realised oil price, mainly propelled by  higher crude oil sales volume amid higher net daily  production rate of 11,180 barrels of oil and oil equivalents  (boe) – up 27% QoQ from 2QFY23.

• Subsequently, the group’s 3QFY23 CNP declined by 38%  QoQ in tandem with the lower revenue and margin  contractions. However, we note that the decrease in effective  tax rate by 14%-point QoQ to 52% in 1QFY23 moderately  cushioned the drop in earnings.

• Operationally, PMA CAA’s daily production rate continued to rise for the second consecutive quarter and is  expected to further increase to 15K boe levels from the ongoing drilling of new production wells over the coming  quarters. In the meantime, North Sabah’s average daily net production also improved slightly by 2% QoQ to 4,704  barrels of oil per day (bopd) in 3QFY23.

• However, Kinabalu and PM305 & PM314 fields recorded a lower daily production rate of 2,442 bopd (-26% QoQ)  while Anasuria’s daily production also dipped lower to 2,699 bopd (-10% QoQ).

• The management has revised its full-year FY23F sales target to 7.2 million barrels of oil and oil equivalents  (mmboe), down from 7.2-7.5 mmboe previously.

• Over the coming 2-3 years, the group’s earnings growth trajectory will be underpinned by ongoing organic  expansions, namely the SF30 Waterflood Phase 2 project in North Sabah and Teal West project in Anasuria. Both  projects, which are scheduled to be completed in 2HCY24, are estimated to increase Hibiscus’ daily production  by an additional 5K-6K barrels of oil equivalent per day (boe/day) or 26%-32% to 26K boe/day.

• The group also targets to reach a daily production of 35K-50K boe/day by 2026, which hinges on an aggressive  pipeline of exploration and development opportunities within the existing portfolio as well as the addition of new  assets via acquisition and bidding of new licenses.

• Currently, Hibiscus is trading at an appealing EV/2P reserve of US$5.72barrel, at a discount of 24% to its closest peer, UK-listed EnQuest, and 52% to the regional average.  

Source: AmInvest Research - 25 May 2023