Reach’s FY18 core loss of RM27m came above our expectation due to one-off adjustment on depreciation charge as a result of higher 2P reserves (+9% YoY). Overall, core loss widened by 3% in FY18 on higher interest expense on the deferred consideration, masking higher production (+29% to 3.1k bopd) and higher crude prices. We make no changes to our FY19-20 estimates with the expectation of depreciation charge to normalise subsequently. In all, maintain HOLD with unchanged TP of RM0.34 pending a clear funding plan in order to execute its capex program as well as to repay the outstanding deferred consideration to MIE

Results deemed above expectations. FY18 core loss of RM26.5m came above our expectations at only 74% of our FY18 loss estimates. The positive result was largely due to one-off adjustment to its depreciation charge as a result of higher reserves being identified upon its annual review. No dividend was declared, as expected.

QoQ: Core loss narrowed by 73% to RM2.6m from RM9.8m in 3Q18 mainly due to higher production (+19% to 3.1k bopd in 4Q18) and lower depreciation (-91%; one-off adjustment upon higher reserves). This was offset by higher finance cost.

YoY: Core loss also narrowed by 70% from RM8.8m in 4Q17 thanks lower depreciation (-96%; one-off adjustment upon higher reserves) and higher production (+19%). It is partially offset by to higher finance cost.

YTD: Despite revenue increase of 40% led by higher production (+29% to 3.1k bopd in FY18) and higher average crude selling prices, FY18 core net loss also widened by 3% to RM26.5m due to higher interest expense on the deferred consideration.

Outlook. Note that the latest independent reserves review show that the 2P oil, LPG and gas reserves in the Emir-Oil Concession Block has increased by 9% YoY to 88.4mmboe as of 1-Jan-19 while the 3P reserves have fallen 5% YoY to 141.8mmboe. Reach has scheduled for two exploratory drilling, one each in the North Kariman and Yessen fields, as compared to three exploratory wells (NK-3, K-16 and K-15) in FY18. The application for Trial Production Period (TPP) license for the Yessen Field is ongoing, pending authority approval. Meanwhile, Reach is also planning on new development wells and the commissioning of the Central Processing Facility (CPF).

External funding needed. In order to execute its ambitious plans in the pipeline, Reach needs to raise funds up to USD100m to repay the outstanding deferred consideration and capex with debt financing being the preferred option. Note that there is RM307.7m due to MIE Holdings Corporation in 12 month time and Reach is in discussion with the former to defer the payment.

Forecast. We are keeping our earnings estimates as we reckon that the depreciation charge would normalise in the coming few quarters.

Maintain HOLD, TP: RM0.34. Despite Reach having higher reserves as of 1-Jan-19, we would like to maintain our DCF valuation at this juncture pending a clear funding plan in order to execute its capex program as well as to repay the outstanding deferred consideration to MIE. Therefore, we are keeping our HOLD recommendation on the stock with unchanged DCF derived TP (20% discount) of RM0.34.

Source: Hong Leong Investment Bank Research - 1 Mar 2019