Investment Highlights

• We maintain BUY on Hibiscus Petroleum (Hibiscus) with an slightly higher sum-of-parts based fair value (FV) of RM3.44/share (from RM3.41/share previously) , which implies an enterprise value (EV)/proven and probable reserves (2P) valuation of US$9.40/barrels of oil (bbl) vs. EnQuest's US$8.94/bbl and the regional average of US$8.96/bbl . The FV also incorporates a 3% premium based on our in-house ESG rating of 4 stars .

• The adjustment to our FV accounts for a stronger FY24F total annual offtake level of 7.5mil barrels of oil equivalent (MMboe), broadly in-line with the group’s target. This raises FY24F-FY26F earnings by 4%-7%.

• Hibiscus’ 1HFY24 core net profit (CNP), excluding unrealised forex losses of RM11mil, was slightly above expectations at 64% of our FY24F estimates but broadly in line with street’s at 61%. For reference, 1H accounted for 67% of FY23 CNP.

• We expect to see a sequentially flattish performance in 2HFY24 as the group booked an extra offtake for the North Sabah Enhanced Oil Recovery (EOR) asset in 1QFY24.

• The group declared a second interim dividend per share (DPS) of 2 sen, bringing 1HFY24 to 4 sen. This translates to a payout of 20%. Hibiscus intends to distribute a FY24F minimum DPS of 7.5 sen, a 30% increase after a 1:2.5 share consolidation exercise in October 2023.

• Hibiscus’ 1HFY24 revenue was flattish at 4.3% YoY as stronger growth from the PM3 CAA production sharing contract (PSC), which recorded average daily net production growth of 19%, was dragged by nearly all other PSCs. Similarly, the group’s 1HFY24 CNP rose marginally by 1.5% as EBITDA margins remained relatively stable at 51%.

• 1HFY24 effective tax rate returned closer to normalised Petroleum (Income Tax) Act 1967 levels at 40%, a decline of 710 bps YoY, which we gather is partly due to a reversal of over-provision of RM8mil (with a penalty of RM4.5mil) for 2018 assessment.

• Sequentially, 2QFY24 topline saw a decline of 16% primarily due to: (a) higher base effect from North Sabah EOR PSC; and (b) lower average crude oil selling prices, particularly for Peninsular Hibiscus assets. 2QFY24 CNP saw a larger decline by 28% as stable operating performance was offset by higher depreciation due to strong gross production levels.

• The group’s total net sales volume declined by 7% QoQ to 1.9MMboe of oil, condensate and gas in 2QFY24 due to higher offtake in 1QFY24 for North Sabah PSC. However, management estimates this figure to remain flattish at 1.8MMboe in 3QFY24 and 2.0MMboe in 4QFY24 , with full-year sales volume in the range of 7.5-7.8MMboe (vs. 7.1MMboe in FY23). As such, we expect to see a sequentially flattish topline performance, supported by the North Sabah PSC, which is expected to see another additional offtake in 4QFY24.

• In the medium term, we expect to see the group’s earnings growth trajectory underpinned by ongoing organic expansions, namely the SF30 Waterflood Phase 2 project in North Sabah and Teal West project in Anasuria.

• 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 acquisitions and bidding of new licenses.

• Currently, Hibiscus is trading at an appealing EV/2P reserve of US$6.71barrel, a 25% discount to its closest peer, UK-listed EnQuest, and the regional average.

Source: AmInvest Research - 21 Feb 2024