Hibiscus Petroleum reported a 4QFY22 core net profit of RM217.5m (+519% QoQ, +338% YoY), bringing FY22 core earnings to RM342.7m (+231% YoY). We deem the results to be above expectations – beating our full-year forecasts and full-year consensus estimates by 28% and 18% respectively. The stellar performance for the quarter was due to timely offtake schedules coupled with elevated ASPs (from high crude oil prices). All-in, we maintain BUY on Hibiscus Petroleum with a marginally higher TP of RM1.63/share after: (i) tweaking our USD/MYR exchange rate assumption to 4.28 (from 4.18 previously); and (ii) axing out FY22 from our DCF computation.

Above expectations. Hibiscus Petroleum reported 4QFY22 core net profit of RM217.5m (+519% QoQ, +338% YoY), bringing FY22 core earnings to RM342.7m (+231% YoY) – after having adjusted for: (i) RM317.3m of negative goodwill (basically gain on acquisition of FIPC assets); and (ii) RM46.9m of impairment of intangible assets. We deem the results to be above expectations, beating our/consensus estimates by 28%/18%. Key variance against our forecast was due to: (i) higher than expected realised crude oil price in 4QFY22; and (ii) the recognition of previously unrecognised deferred tax assets amounting to RM56.0m.

Dividend. No dividends were declared in 4QFY22 – which was well expected. Total dividends in FY22: 1.0 sen/share.

QoQ. Core net profit grew more than 6x QoQ due to: (i) higher number of offtakes for its North Sabah and FIPC Kinabalu asset; and (ii) higher average realised crude oil price across its assets.

YoY. Core net profit grew more than 4x YoY due to: (i) recognition of sales volume in 4QFY22 from both Hibiscus’s newly-acquired FIPC assets – Kinabalu Oil and PM3CAA; and (ii) significantly higher realised crude oil prices in 4QFY22 backed by elevated oil prices.

YTD. Core net profit grew more than 3x YoY (vs FY21) due to similar reasons mentioned in the YoY paragraph.

Key briefing takeaways. Below are our key takeaways from our discussion post results with Hibiscus’s key management team yesterday:

1) The group is still in discussion with the Sabah state government in regards to the current Sabah Sales Tax debacle. No specific timeline was mentioned.

2) Hibiscus did not enter into any forward sales, indicating that all of its offtakes will be done at spot prices.

3) The subsea riser replacement for the group’s Anasuria asset will be completed by end-Sept 2022 (which is in line with initial schedule).

4) Hibiscus plans to gear up on conventional bank borrowings (debt) for its future capex plans – i.e. expansion in Teal West (Anasuria) and Waterflood Phase 2 (North Sabah). Target net gearing ratio: not more than 0.3x.

5) The group has mentioned that it is currently in discussion with Petronas and PetroVietnam for the extension of the newly-acquired PM3CAA producing asset (initially to be decommissioned in 2037). Note that the asset’s life has already been extended once (from 2027 to 2037). The outcome of the discussion is expected to be known by mid-2024. We gather that the minimum project IRR for Hibiscus to take on this extension and additional capex stands at 15%.

6) Tentatively, Hibiscus is targeting at a total offtake volume of 7.2-7.5m boe for FY23 (vs. 4.6m boe for FY22).

7) Profit recognition in the upcoming quarter (1QFY23) will be significantly weaker than current quarter under review (4QFY22) due to substantially lower offtake volumes guided. 1QFY23 offtake volume guidance: 1.65m boe (vs. 4QFY22 offtake volume: 2.02m boe).

8) There were no guidance given on the impact of the 25% windfall tax in the UK as the group has indicated that it needs to work out its capex spending estimates (the windfall tax is capex deductible).

Forecast. We tweak our FY23-24f net profit forecast marginally upwards by 4% for both forward years after imputing a higher USD/MYR exchange rate assumption of 4.28 (from 4.18 previously) to match our in-house estimates.

Maintain BUY, higher TP: RM1.63/share. We maintain BUY on Hibiscus Petroleum with a marginally higher TP of RM1.63/share after: (i) tweaking our USD/MYR exchange rate assumption to 4.28 (from 4.18 previously); and (ii) axing out FY22 from our DCF computation. Our TP of RM1.63/share is derived based on NPV of all its producing assets’ future free cash flows (FCF) – after accounting for each asset’s targeted lifespan. At about only 3x 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 - 25 Aug 2022