Hibiscus reported 2QFY23 core earnings of RM115.4m (-15% QoQ, +138% YoY), bringing 1HFY23 core net profit to RM250.6m (+178% YoY). We deem the results to be within expectations at 46%/52% of ours and consensus full-year estimates respectively. Core net profit declined 15% QoQ due to: (i) lower realised crude oil / gas prices QoQ across all of its major assets; and (ii) the weaker USD/MYR rates. However, it was partially cushioned by significantly higher offtake volume throughout the quarter of 2.0m boe in 2QFY23 (vs. 1.5m boe in 1QFY23). All-in, we maintain BUY on Hibiscus with a marginally lower TP of RM1.50/share, which is derived based on NPV of all its producing assets’ future free cash flows (FCF) – after accounting for each asset’s targeted lifespan.

Within expectations. Hibiscus reported 2QFY23 core earnings of RM115.4m (-15% QoQ, +138% YoY), bringing 1HFY23 core net profit to RM250.6m (+178% YoY) – having adjusted for: (i) RM99.1m of deferred tax liability arising from the Energy Profit Levy computations (akin to quarterly reversal of provisions till 3QFY28); (ii) RM67.5m of reversal of overprovision of taxes relating to PITA and corporate tax for its PM3CAA asset; and (iii) RM13.3m of higher inventory valuation for its Block 46 operations in Vietnam. We deem the results to be within expectations at 46%/52% of ours and consensus full-year estimates respectively.

Dividend. Dividends of 0.75sen/share were declared in 2QFY23 – which came in as a pleasant surprise. We now forecast a 2.5sen dividend payout for FY23f.

QoQ. Core net profit declined 15% QoQ due to: (i) lower realised crude oil / gas prices QoQ across all of its major assets; and (ii) the weaker USD/MYR rates. However, it was partially cushioned by significantly higher offtake volume throughout the quarter of 2.0m boe in 2QFY23 (vs. 1.5m boe in 1QFY23).

YoY. Core net profit more than doubled YoY due to: (i) significantly higher offtake volume post-recognition of FIPC assets’ sales volume in 2QFY23 – Kinabalu Oil and PM3CAA; and (ii) significantly higher realised crude oil / gas prices YoY across all of its major assets throughout the quarter.

YTD. Core net profit almost tripled YoY in 1HFY23 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 subsea riser for the group’s Anasuria asset has been successfully replaced (at end-Sept 2022) which has significantly boosted the production of the asset in 3QFY22.  

2) Realised gas prices in the PM3CAA asset dipped 19% QoQ to USD4.71/mscf. We note that there is a huge influx of supply post-embargo of Russian refined products (high sulphur fuel oil) in the Asian market.  

3) The group has guided for its tentative offtake volume schedule for the next 2 quarters – which is 1.8m boe and 2.0m boe for 3-4QFY23 respectively.  

4) We highlight that the group had initiated discussions with Petronas and PetroVietnam to extend the recently acquired PM3CAA’s producing license by another 10 years (till 2037). If approved, Hibiscus aims to drill more wells for the asset in 2024-2025. We gather that the minimum project IRR for Hibiscus to take on this extension and additional capex stands at 15%. 

5) Tentatively, Hibiscus is targeting at a total offtake volume of 7.3m boe for FY23 (vs. 4.6m boe for FY22). See Figure #4 for more details.  

6) Hibiscus expects the first oil for the Teal West asset to be at 2HCY24 (net production of about 4-5k bpd) and Waterflood Phase 2 to be at 1HCY2024 (net production of about 6k bpd).

Forecast. We trim our FY23-25f net profit forecasts by 9%, 6% and 12% respectively to account for higher tax rate assumptions arising from the EPL.

Maintain BUY, lower TP: RM1.50/share. We maintain BUY on Hibiscus Petroleum with a marginally lower TP of RM1.50/share, which 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 5x FY24f 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 - 17 Feb 2023