HIBISCUS: Direct proxy to the elevated oil prices

Buoyant oil price. Brent oil price surged over $90/bl for the first time since Oct 2023, propelled by (i) escalating geopolitical tensions in the Middle East, (ii) OPEC+’s decision to maintain production cut, (iii) Ukraine strikes on Russia’s refineries, and (iv) strong PMI data in the US and China. Looking forward, the outlook for oil prices is likely to remain elevated due to the tightening oil supply outlook. The optimistic stance is echoed in EIA’s short-term oil market outlook, which predicts that the tight supply causing inventory drawdown will push oil prices higher in 2Q24. Additionally, the expected surge in summer gasoline demand and a rebound in China's oil demand are likely to further bolster oil prices. Hene, EIA has revised its 2QFY24 forecast for Brent oil to an average of $88bbl, a 4.8% jump from its previous projection.

Amidst this buoyant oil price environment, HIBISCUS stands out as a compelling investment opportunity, being the sole pure E&P player. Notably, HIBISCUS's share price performance is highly correlated with global oil prices, boasting a 5-year beta of 1.9x in relation to Brent crude oil prices. Hence, we advocate investors to accumulate HIBISCUS to capitalize on the recent oil price rally.

Earnings outlook for 3QFY24. Looking at the comparably lower oil price during the period (Brent oil 3QFY24: USD81.7 vs 2QFY24: USD82.8) alongside with a lower offtake volume (3QFY24f: 1.7m bl vs 2QFY24: 1.9m bl) as guided by the management, we anticipate HIBISCUS's earnings for the quarter will exhibit a QoQ decline. However, investors should look beyond this temporary setback, as a quick rebound in earnings is expected in the following quarter (4QFY24). This optimism is underpinned by the management's forecast of higher offtake volume at 2.06m/barrel, alongside an improved oil price environment.

A breakout above LT downtrend channel. The breakout above its long-term downtrend channel on 3rd April signals a trend reversal for HIBISCUS. Bolstered by bullish indicators, the stock is poised to advance further towards RM2.83-2.91-3.00 levels. Cut loss at RM2.53.

Collection range: RM2.64-2.66-2.70

Upside targets: RM2.83-2.91-3.00

Cut loss: RM2.53

Source: Hong Leong Investment Bank Research - 9 Apr 2024