We initiate coverage on Hibiscus with a BUY recommendation and a TP of RM1.85/share based on the NPV of all of its producing assets’ future cash flows (FCF) – based on each asset’s targeted lifespan. We strongly believe that investors have not priced in the exquisite prospects of Hibiscus’s profits and cash flows in the upcoming quarters – mainly from: (i) additional production volumes from the completed acquisition of FIPC (Repsol) assets in Jan 2022; and (ii) significantly higher crude oil prices. At about only 4.5x FY23F P/E, we believe that Hibiscus is a compelling case and is conspicuously undervalued given its strong foothold in the upstream energy space.

An established oil & gas upstream name. Hibiscus is a Malaysia’s first listed independent oil and gas exploration and production (E&P) company. Hibiscus holds operated interests in multiple concessions in the UK and Australia and a production sharing contract (PSC) in Malaysia. The group’s well-balanced portfolio consists of production, development and exploration assets. Throughout this report, we will be mainly focused on the group’s production assets i.e. Anasuria Cluster, North Sabah and FIPC (Repsol).

Oil price to stay elevated – above pre-war levels. The US shale oil industry was neglected for years by the Biden administration and demonized worldwide for exacerbating climate change. Due to ESG mandates from investment managers, activist shareholders proposals and difficulty in securing loans from the bank, oil producers are not incentivized to invest in expanding their production capacity. Besides, there is also an overhanging concern that in the event that the war deescalates and the sanctions were lifted, the Biden administration may revert to its efforts to push for a transition away from the oil industry. We find that oil producers are not likely to invest in further supply as they enjoy record high prices that provide their investors with big dividends. Moreover, corporate interests on Wall Street are looking to grow production only modestly due to ESG mandates, activist shareholder proposals and banks avoiding loans to the industry. We conclude that both US shale producers and OPEC are finding themselves to be on the same side of the coin – both are in no rush to rapidly boost production.

Acquisition of FIPC (Repsol assets) to increase production output (boepd) by almost 3-fold in FY22-23f. We note that the total forecasted production output for Anasuria and North Sabah assets in FY22-23f are 7.8k and 8.8k boepd respectively. FIPC assets would boost an additional 14.3k and 14.6k boepd for FY22-23f, effectively increasing production output by almost 3-fold to a total of c.22.1k and 23.4k boepd respectively. As the acquisition of FIPC was completed only on 25 January 2022, we would only be able to see this asset’s contribution to the Hibiscus group in its upcoming 3QFY22 results and beyond.

Impressive earnings growth: record high profits in FY22 and an outstanding FY23. We are forecasting Hibiscus’s core net profit to increase more than 3x to RM336.2m in FY22 and to rise yet again by another 86% to RM625.6m in FY23 (Figure #16 and Figure #17) – representing a superior CAGR of 146%. Our average realised crude oil price assumptions for the group is relatively conservative at USD90/bbl for FY22 and FY23.

Initiate with a BUY, TP: RM1.85/share. We initiate coverage on Hibiscus Petroleum with a BUY recommendation and TP of RM1.85/share. At about only 4.5x FY23F P/E, we believe that Hibiscus is a compelling case and is conspicuously undervalued given its strong foothold in the upstream energy space.

Source: Hong Leong Investment Bank Research - 9 May 2022