Reach’s 9MFY18 core loss of RM23m deemed within our expectation at 63% of our FY18 loss estimates as we expect a relatively weaker 4Q18 in view of weaker oil prices. Core loss widened by 50% in 9M18 due to higher interest expense on the deferred consideration and higher depreciation cushioning the positive impact arising from higher production level. Following that, we maintain our FY18 core loss forecast but cut FY19-20 earnings forecasts by 30%/14% on lower production volume assumption. Maintain HOLD rating with lower DCF derived TP of RM0.34 (from RM0.41).

Results deemed within expectations. 9M18 core loss of RM22.5m is deemed within our expectations at 63% of our FY18 loss estimates as we expect a relatively weaker 4Q18 in view of weaker oil prices. No dividend was declared, as expected.

QoQ: Core loss widened by 2.3x to RM14.2m (from RM4.2m in 2Q18) mainly due to lower production (-10% to 2.6k bopd in 3Q18) and absence of deferred sales from 1Q18 that was being recognised in 2Q18. 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: Core loss also widened by 1.3x in 3Q18 (from RM6.1m in 3Q17) no thanks to (i) higher interest expense on the deferred consideration and higher depreciation (+1.5x; due to higher production and revision in reserve estimate) cushioning the positive impact arising from higher production level (+24% from 2.1k bopd).

YTD: Despite revenue increase of 41% led by higher production (+22% to 2.8k bopd in 9M18) and higher average crude selling prices, 9M18 core net loss also widened by 50% to RM22.5m due to higher interest expense on the deferred consideration and higher depreciation (+1.4x; due to higher production and revision in reserve estimate).

Outlook. Its producing asset in Kazakhstan, Emir-Oil LLP has recently obtained authority approval to commence Trial Production Period (TPP) of the North Kariman (NK) Field for 18 months, starting from 1 October 2018. The TPP approval allows Emir-Oil to put the NK wells on production and pursue a new production contract for the NK Field. Having said that, we understand that the NK-1 well is under workover and thus we might expect the contribution from these wells to kick-in later. Meanwhile, Reach has entered into a MOU with GPC to venture into downstream oil & gas business and strengthen its presence in Kazakhstan. Should the collaboration turn out well, Reach might be able to further monetise its non-associated gas reserves in the longer run.

Forecast. We maintain our FY18 loss estimates of RM35.9m but cut our FY19-20 earnings forecast by 30%/14% to RM12.9m and RM34.6m on lower production volume assumption.

Maintain HOLD, TP: RM0.34. Post earnings adjustment and fine tuning our volume assumptions, we maintain HOLD recommendation with lower DCF derived TP (20% discount) of RM0.34 (from RM0.41).

Source: Hong Leong Investment Bank Research - 3 Dec 2018