Hibiscus plans to list up to 2bn CRPS at RM1 per CRPS share to raise RM2bn for asset acquisitions. Based on a conversion price of RM0.66 (first tranche), 3.03bn new Hibiscus shares are expected to be issued pursuant to the full conversion of the CRPS. The acquisition is required to have a payback period of ≤5 years and a project IRR of ≥12%. The conversion price of RM0.66, represents a c.10% premium to the 5 day VWAP price up to 8 Sept 2020, of RM0.5972. The combined size of the asset to be acquired would be significantly larger than the combined size of Anasuria and North Sabah as the acquisition cost of the assets would be at least c.6x more than the combined price paid for Anasuria and North Sabah. Management believes that the asset acquisition would be value accretive to CRPS holders despite its current conversion premium of about c.32% to the last closing price.

Background. Hibiscus is an independent upstream E&P company. It started off as a special purpose acquisition company (SPAC) and it currently owns and operates oil fields in the North Sea, Malaysia and Australia.

Raising RM2bn for asset acquisition. Hibiscus plans to list up to 2bn CRPS shares at RM1/share to be issued via proposed private placement. The proposed placement of up to 2bn shares may be implemented in single or multiple tranches. The conversion price for the first tranche is fixed at RM0.66, representing a c.10% premium to the 5 day VWAP price up to 8 Sept 2020 (last market date before the announcement), of RM0.5972. A total of 3.03bn new Hibiscus shares are expected to be issued pursuant to the full conversion of the CRPS at RM0.66.

Necessary approvals from common shareholders required. The CRPS and asset acquisition exercises would have to go through the necessary processes, i.e EGMs in order for it to materialise. CRPS holders would not have voting rights.

Fixed interest rate of 4% p.a. in the event where CRPS proceeds are not utilized. CRPS holders would be able to re-coup its investments at a fixed interest rate of 4% p.a. if the proceeds raised are not utilized for asset acquisition. We believe that there would be adequate check and balances as common shareholders would not support an asset acquisition which they deem to be value dilutive.

Combined asset acquisitions to be bigger than both Anasuria and North Sabah combined. Hibiscus has identified 1-3 assets with a combined value of RM2bn or more (asset will be financed through debt for any value exceeding RM2bn), which is about >c.6x the combined acquisition price of North Sabah and Anasuria (c.RM320m).

Potentially value accretive for common shareholders. The current conversion price of RM0.66 for the CRPS implies a theoretical market price of RM0.60 (see Figure #10) which is c.21% higher than yesterday’s closing price; this may serve as a near term benchmark pricing for Hibiscus’ share price.

Hurdle rates of investment may provide upside potential for CRPS holders. We believe that Hibiscus has already identified the assets that they would like to acquire and its investment hurdle rates denotes that its asset acquisition would have to have a minimum 12% project IRR with a payback period ≤5 years. Management believes that the acquisition would be value accretive to CRPS holders and the Company is confident that the take up would be good even at a conversion premium of c.32%.

Source: Hong Leong Investment Bank Research - 20 Oct 2020