• Hibiscus proposed to raise RM2bn to acquire producing assets within South East Asia region.
   
• We believe it is timely to add more assets into its portfolio as they fetch better valuation during low oil price. However, there is risk that it may not garner good returns should low oil price persist.

• The exodus of oil majors from the region opens up more opportunity for Hibiscus to expand its operation regionally, hence requiring stronger balance sheet.

• Upgrade to HOLD with unchanged DCF-derived TP of RM0.54.

Raising RM2bn to acquire producing asset

Hibiscus announced that it wishes to raise RM2bn from issuance of convertible redeemable preference shares (CRPS) through a private placement exercise. The proceeds will be utilised for acquiring producing assets in South East Asia which meet its qualifying criteria including (i) short payback period of less than 5 years and (ii) generate internal rate of return (IRR) of more than 12%.

A good predator, but…

We are cautiously optimistic with its intention to buy producing assets as Hibiscus has a good track record in conducting similar transactions. Previously, both Anasuria cluster and North Sabah fields were acquired at below USD3/bbl (Table 1) and gave short payback period of less than 3 years. In view of current low oil price, we believe it is timely to buy new assets as they will be priced at bargain levels, hence helping the company to avoid overpaying for such assets. Producing assets also carry low development risk with immediate positive impact to bottomline and cashflows. However, the mandatory work programme subsequent to the acquisition may not provide sufficient returns should prevailing low oil price persists.

Opportunity for growth

In the long run, we expect more oil majors to be leaving the region and gives greater focuses towards larger assets in the portfolio and the renewables. Locally, Murphy Oil has sold its Malaysian operation to PTTEP for USD2.13bn while Exxon, Petrofac and Repsol were also reported to consider selling its Malaysian assets as part of its portfolio review. As such, we think a strong balance sheet is necessary for Hibiscus to pursue more M&A opportunities and filling the gap left by oil majors.

Upgrade to HOLD with unchanged TP RM0.54

We upgrade Hibiscus to HOLD (from SELL) with unchanged DCF-derived TP of RM0.54 (Table 2). We see Hibiscus as a good candidate to replace oil majors’ role in the regional oil field development.

Source: BIMB Securities Research - 10 Sept 2020