Reach’s 1QFY18 core loss of RM19.20m was below HLIB estimates. Core loss widened to RM19.0m mainly due to lower revenue and higher depreciation and amortisation expenses. Trial Production licence approval is expected shortly for the North Kariman Field and flow line design and installation work in underway to prepare for production of c. 1,000 bopd from this field in the second half of 2018. This represents c.34% growth of production volume from current level. Increased FY18 core loss forecast to RM25.8m and reduced FY19 earnings forecast by 3.3% to reflect lower oil production volume assumptions. We introduce our FY20 forecast of RM52.1m. Maintain BUY recommendation with lower DCF derived TP of RM0.34 (from RM0.40) post earnings forecast adjustment.

Results below expectations. 1Q18 core loss came in at RM19.0m, below HLIB expectations (FY18 core loss of RM19.0m). The weaker than expected results were mainly due to lower than expected oil production volume.

YoY: Core loss widened to RM19.0m (from RM3.5m in 1QFY17) mainly due to lower revenue and higher depreciation and amortisation expenses. Lower revenue was recorded despite increase in oil production to 2,900 barrels of oil per day (bopd) (from 2,300 bopd in 1Q17) due to deferment of RM7.6m worth of crude oil into April 18 for shipment that was caused by limitation of export quota.

QoQ: Core loss of narrowed (from RM26.0m in 4Q17) mainly due to lower depreciation and amortisation expenses.

2H18 Production. Trial Production licence approval is expected shortly for the North Kariman Field and flow line design and installation work is underway to prepare for production of c. 1,000 bopd from this field in the second half of 2018. This represents c.34% growth of production volume from current level.

Central Processing Facility. Reach is close to resuming the construction work associated with the Central Processing Facility as it is a key element to the group plans to ramp up production. When commissioned in 3Q19, the facility would enhance Reach oil handling capacity to 12,000 bopd.

Forecast. Increased FY18 core loss forecast to RM25.8m and reduced FY19 earnings forecast by 3.3% to reflect lower oil production volume assumptions. We introduce our FY20 forecast of RM52.1m.

Maintain BUY, TP: RM0.34. Maintain BUY recommendation with lower DCF derived TP of RM0.34 (from RM0.40) post earnings forecast adjustment.

Source: Hong Leong Investment Bank Research - 28 May 2018