Reach’s 1HFY18 core loss of RM21.9m came in narrower than expected due to lower than expected interest cost. Core loss widened by 1.5x in 1H18 due to higher interest expense on the deferred consideration and higher depreciation cushioning the positive impact arising from higher production level (+20%). Production is expected to improve to 3.2k-3.5k bopd in 2H18 from current 2.9k bopd. Following that, we narrowed our FY18 core loss forecast by 18% and increased FY19 earnings forecast by 37% on lower interest cost. However, FY20 earnings are adjusted down by 10% on lower production volume assumption. Maintain HOLD rating with unchanged DCF derived TP of RM0.28.

Results above expectations. 1H18 core loss of RM21.9m surpassed our expectations accounting for only 45% of our full year FY18 loss estimates. The better than expected results is due to lower than expected interest cost being charged in 1H18.

QoQ: Core loss narrowed by 76% to RM4.2m (from RM17.7m in 1Q18) mainly due to higher average selling prices for crude lifted and deferred sales from 1Q18 despite production volume staying flattish at 2.9k bopd. Recall that lower revenue was recorded in 1Q18 due to deferment of RM7.6m worth of crude oil into April 18 for shipment that was caused by limitation of export quota.

YoY: As evident by 66% increase in topline, core loss also narrowed by 56% in 2Q18 (from RM9.6m in 2Q17) on the back of stronger production volume (+16% to 2.9k bopd from 2.5k bopd), higher average selling prices and deferred revenue from 1Q18.

YTD: 1H18 core net loss widened by 1.5x no thanks to (i) higher interest expense on the deferred consideration and higher depreciation (+1.4x; due to higher production and revision in reserve estimate) cushioning the positive impact arising from higher production level (+20%).

2H18 production. Trial Production licence approval is expected shortly for the North Kariman Field and flowline design and installation work is underway to prepare for production. Thus, according to the management, 2H18 production is expected to improve to 3.2k-3.5k bopd.

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’s plans to ramp up production. When commissioned in 3Q19, the facility would enhance Reach’s oil handling capacity to 12,000 bopd.

Forecast. Narrowed FY18 core loss forecast by 18% to RM35.9m after factoring in lower interest expense. Meanwhile, we increased our FY19 earnings forecast by 37% to RM16.1m factoring lower interest cost. However, FY20 earnings are cut by 10% on lower production volume assumption.

Maintain HOLD, TP: RM0.28. Post earnings adjustment and fine tuning our volume assumptions, we maintain HOLD recommendation with unchanged DCF derived TP of RM0.28.

Source: Hong Leong Investment Bank Research - 28 Aug 2018