Hibiscus Petroleum reported a 3QFY22 core net profit of RM35.1m (-28% QoQ, +10% YoY) and 9MFY22 core numbers of RM125.1m (+132% YoY). We deem the results to be below expectations – at 37% of our full-year forecasts and 39% of consensus full-year estimates. We highlight that the poor performance in 3QFY22 was due the unfortunate offtake timings throughout the quarter and with that, we view that it would not be a fair representation of what a “normal” quarter would look like post-FIPC acquisition. All-in, we maintain BUY on Hibiscus Petroleum with a lower TP of RM1.73/share after tweaking our production volume assumptions. At about only 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.

Missed expectations – not due to operational/production issues but the unfortunate timing of offtakes in 3QFY22. We deem 3QFY22 core net profit of RM35.1m (-28% QoQ, +10% YoY) and 9MFY22 at RM125.1m (+132% YoY) to be below expectations at 37%/39% of our/consensus full-year estimates. 9MFY22 core net profit was adjusted for: (i) RM317.3m of negative goodwill (basically gain on acquisition of FIPC assets); and (ii) RM44.9m worth of impairment of intangible assets. Key variance against our forecast was due to the unfortunate offtake timings throughout the 3QFY22 quarter – which we will explain throughout the report.

Dividend. Dividend of 1.0sen/share was declared – which was a pleasant surprise. We understand that the group will try to be consistent with a quarterly dividend payout from 3QFY22 onwards.

QoQ. Revenue was flat while core net profit was down by 28% despite ours and market’s initial expectations of a multi-fold earnings growth QoQ. This is due to a misconception that production volume equals sales volume. For Hibiscus, sales are usually done in batches known as “offtakes”. We highlight two unfortunate timing issues throughout 3QFY22: (i) there was only 1 offtake for North Sabah (customarily there are 2 offtakes per quarter); and (ii) FIPC Kinabalu Oil’s offtake for the quarter was done in mid-Jan 2022 (the actual acquisition was completed on 24 Jan 2022) and due to accounting practices, the sales volume for this offtake was not recorded in Hibiscus’s books in 3QFY22. With that, we note that the upcoming quarter 4QFY22 would be a better representative of what a “normal” quarter would be without the 2 aforementioned anomalies.

YoY. Revenue and core net profit was up 38% and 10% YoY respectively in 3QFY22 mainly due to: (i) significantly higher realised oil prices despite lower offtake volumes throughout the quarter (both Anasuria and North Sabah); and (ii) recognition of sales volume from its PM3CAA asset. Similarly, we note that this is not a fair representation of what a normal quarter would look like post-FIPC acquisition.

YTD. Revenue and core net profit was up 50% and 132% respectively due to similar reasons mentioned in the YoY paragraph.

Key briefing takeaways. We had a long-drawn discussion post-results with Hibiscus’s key management team yesterday – Dr. Kenneth Pereira (Group MD), Yip Chee Yeong (CFO) and Deepak Thakur (VP of Economics and Business Planning). Below are our key takeaways:
1) North Sabah asset typically has 6-7 offtakes annually. So, there will be one quarter annually that would only register one offtake. In FY22’s case, it was in 3QFY22 – where each quarter’s offtake schedule would be 2-2-1-2. With that, we are expecting 2 offtakes in 4QFY22.
2) Anasuria and Kinabalu Oil has one offtake every quarter. For PM3CAA, there are many offtakes so sales volumes are expected to be consistent every quarter. The only “wild card” to look out for would be the group’s North Sabah offtake schedule. With that, we think that the upcoming quarter 4QFY22 would be a better representative of how current elevated oil price environment (>USD100/bbl) coupled with additional volumes from FIPC would pent out for the group.
3) As production volumes does not equate to sales volumes, we opine that it would be more appropriate to analyse Hibiscus on an annual basis – rather than quarter-to quarter as offtake batches are lumpy and huge in nature, which may deviate or create an earnings vacuum in certain quarters.
4) Throughout the quarter, North Sabah’s production output was lower by -21% QoQ and -29% YoY to 4,695 bpd due to: (i) unplanned production interruptions in Jan 2022; and (ii) the commencement of an annual planned major maintenance in Mar 2022.
5) Anasuria’s production output also dipped -5% QoQ and -30% YoY to 1,983 bpd in 3QFY22 due to: (i) a subsea riser malfunction; and (ii) a planned well intervention programme carried out at the Guillemot A field. There will also be another planned offshore turnaround in June-July 2022. Also, we understand that the group plans to replace the malfunctioned subsea riser in August 2022.
6) 3QFY22’s sales volume was estimated to be at c.920k boe. We estimate sales volumes to more than double to 2,076k boe in 4QFY22. Also, 45% of the group’s offtake volumes in FY22 will be recognised in the next quarter.

Forecast. We trim our FY22-24f earnings forecast by 18%, 10% and 25% respectively to account for lower production volumes for its various producing assets. Revised FY21-23f earnings growth would still be substantial at a 133% CAGR.

Maintain BUY, lower TP: RM1.73/share. We maintain BUY on Hibiscus Petroleum with a lower TP of RM1.73/share (from RM1.85) – 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 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 - 26 May 2022