Results

• Below: 2Q17 core loss came in at RM9.6m, turned 1H17 into core loss of RM8.9m, below HLIB forecast (RM17m profit for FY17).

Deviations

• Due to higher than expected start-up costs and slower than expected production ramp up.

Dividends

• No dividend declared.

Highlights

• QoQ: Core loss of RM9.6m was recorded against RM0.7m profit in 1Q17 mainly due to (i) lower sequential realized oil prices in line with Brent crude movement; and (ii) higher purchase, service and direct costs due to ramp up in production. The negative impact was partially offset by higher revenue on oil production ramp up.

• 1H17: Core loss of RM8.9m was reported as average oil production was only at circa 3,000 bbls/day, behind the group’s optimum target of 5000 bbls/day. The slower than expected production ramp up was due to longer transition period of management of the oilfield.

• Its current production bottleneck is at 5,000 bbls/day limited by its currently leased production facility. Post the transition period, the group aims to achieve its optimal production of 5,000bbls/day through Electrical Submersible Pumps (ESPs) and rejuvenation of existing producing wells and shut-in wells via matrix acidizing.

• As a result, the number of producing oil wells is expected to increase to 27 (from 14) by end 2017.

• The new Central Processing facility is only expected to be online earliest in 2H19 when the pipeline connecting the built facility to the main truck line system (is completed. Completion of the pipeline will bring its maximum production to 12,000 bbls.day levels, double from its current capacity.

Forecasts

• Cut FY17/18/19F to RM-22/4/55m from RM10/14/133m to account for higher production ramp up costs and more conservative production volume.

Rating

BUY ( ↔ )

• While production ramp up is slower than expected due to transitional issues, we believe Reach possess solid oil assets at early stage of production life with huge potential for value unlocking.

Valuation

• DCF-driven TP is cut to RM0.43 from RM0.83 previously post earnings reduction and lower long term oil prices assumption. We have also excluded the earlier assumed private placement dilution impact as it has been cancelled by the group. Maintain BUY .

Source: Hong Leong Investment Bank Research - 25 Aug 2017