Reach’s 1H19 core loss of RM20m came below our expectations on lower than expected production volume. Core loss widened by 42% in 1H19 on lower production but was offset by better operating efficiency. Following that, we cut our estimates to RM14.8m and RM3.2m losses (from RM3.7m and RM12.2m profit) in FY19-20 and eventually to turnaround with small profit of RM6.9m (from RM14.0m profit) in FY21. In all, maintain HOLD with lower TP of RM0.18 (from RM0.25) pending a clear funding plan in order to execute its capex program as well as to repay the outstanding deferred consideration to MIE

Results below expectations. 2Q19 core losses of RM11.8m (+46% QoQ; turned losses YoY) brings 1H19’s total core losses to RM19.9m (+42% YoY). This came below our expectations as we have forecasted RM3.7m profit in FY19. The negative results were largely due to weaker than expected production volume. No dividend was declared, as expected.

QoQ: Core loss widened by 46% from -RM8.1m in 1Q19 mainly due to lower production (-14% to 2.4k bopd in 2Q19).

YoY: Reach turned to losses from RM3.6m profit in 2Q18 no thanks to weaker production (-17% YoY from 2.9k bopd in 2Q18) and higher finance cost (interest expenses on loan from corporate shareholder in a subsidiary and interest expenses on deferred consideration).

YTD: 1H19 core losses also widened by 42% to RM19.9m as a result of lower production and higher finance cost. This was partially offset by better operating efficiency resulting in a decrease in distribution cost, staff cost and admin cost.

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 plans to commence drilling of three development wells and 1 exploration well in 2H19. Meanwhile, the company is also trying to prolong the exploration license that is expiring in Jan-20. The application for Trial Production Period (TPP) license for the Yessen Field is ongoing, pending authority approval. The successful application would allow Reach to produce continuously from two discovery wells, Yessen-1 and Yessen-2. A water injection pilot program is planned for 2019 for reservoir pressure maintenance in the Kariman Field and preliminary work has been started. Meanwhile, Reach is also planning to complete 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 RM309.4m due to MIE Holdings Corporation in 12 months’ time and Reach is in discussion with the former to defer the payment.

Forecast. We are projecting Reach to record RM14.8m and RM3.2m losses (from 3.7m and RM12.2m profit) in FY19-20 and eventually turnaround with small profit of RM6.9m (from RM14.0m) in FY21 after adjusting lower production assumptions.

Maintain HOLD, TP: RM0.18. Post earnings adjustment, we lowered our DCF derived TP to RM0.18 (from RM0.25) after applying higher discount of 50% to our DCF (from 40% previously) pending a clear funding plan in order to execute its capex program as well as to repay the outstanding deferred consideration to MIE.

Source: Hong Leong Investment Bank Research - 26 Aug 2019