• 3Q19 core earnings grew 15% qoq to RM58m boosted by 2 oil cargoes from North Sabah PSC. Overall, 9M19 core earnings of RM207m trailed ours and consensus’ forecast at 61%.

• North Sabah output recovered to 14.7k bpd (2QFY19: 13.4k bpd) while Anasuria’s declined to 2.5k bpd (2QFY19: 3.2k bpd) due to maintenance shutdown.

• We cut FY19-21F earnings by 18-23% as operating margin of North Sabah PSC is weaker than we initially expected.

• Maintain BUY with lower DCF-derived TP of RM1.50 (from RM1.60). We remain sanguine on Hibiscus’ plan to develop a greenfield project for its growth.

2 cargoes from North Sabah boosted earnings

Hibiscus’s earnings grew by 16% qoq to RM58m mainly boosted by higher oil sales volume but partially offset by higher effective tax rate. Revenue grew 37% to RM226m as it delivered 3 oil cargoes against 2 cargoes in 2Q19. It sold a total of 828k bbls of crude oil comprising of 1 cargo (249k bbls) from Anasuria at US$60.4/bbl and 2 cargoes (578k bbls) from North Sabah PSC at average price US$67.9/bbl.

Headline profit distorted by negative goodwill

3Q19 headline net profit dropped 34% yoy to RM55m from RM83m mainly due to one-off recognition of negative goodwill gain worth RM112m in 3Q18 arising from the consolidation of North Sabah PSC assets into Hibiscus’ balance sheet. Overall, 9MFY19 core profits of RM207.4m were below ours and consensus forecasts at 61%. We attributed the earnings shortfall to our over-optimistic view on North Sabah’s cost structure.

North Sabah’s production recovered from maintenance

North Sabah’s oil production rose c.9% qoq to average at 14,670 bpd in 3QFY19 mainly as uptime recovered to 95% following planned maintenance activities in 2Q19. Meanwhile, Anasuria's production declined 37% qoq to 2,504 bpd due to maintenance shutdown.

Cut earnings

We trim our FY19-21F earnings forecast by 18-23% as we reduce our EBITDA margin assumption for North Sabah PSC.

Maintain BUY with lower TP at RM1.50

Maintain BUY with lower DCF-derived TP of RM1.50 (from RM1.60). Our valuation is based on finite DCF with WACC of 9% (Table 4). We believe its stock price has yet to reflect the value of Sunflower and Marigold field as the market discount the higher risk associated with this greenfield project, giving opportunity to long-term investor to accumulate at low level.

Source: BIMB Securities Research - 28 May 2019