Investment Highlights

• We downgrade our recommendation on Hibiscus Petroleum (Hibiscus) to HOLD from BUY as the share price has reached near our unchanged sum-of-parts-based fair value of RM1.42/share, which also reflects a premium of 3% from our ESG rating of 4 stars.

• It also implies an enterprise value (EV)/proven and probable reserves (2P) valuation of US$7.40/barrel, at a discount of 49% to EnQuest's US$14/barrel and 59% to the regional average of US$18/barrel.

• We lower the group’s net profit by 6% for FY22F and 8% for higher operating costs as FY23F as Hibiscus’ 9MFY22 core net profit (excluding RM317mil negative good will from Repsol asset acquisition and RM45mil impairment of Australian concessions) of RM122mil (+2x YoY) came in below expectations, accounting for 40% of our earlier FY22F earnings and street’s.

• The disappointing core performance stems from management only securing a single offtake in 3QFY22 for North Sabah vs. 2 in 2QFY22 while the profit from the acquired Repsol assets, which commenced contribution from 25 January this year, was largely recognised in the negative goodwill arising from the deal completion.

• While our crude oil price assumptions of US$100/barrel for FY23F and US$90/barrel for FY24F are maintained, we raise FY25F estimate to US$80/barrel from US$60/barrel previously as the global supply-demand imbalance could be protracted given investors’ persistent ESG prerogatives amid the Russia-Ukraine conflict.

• On a QoQ comparison, 3QFY22 core net profit fell 37% QoQ to RM31mil due to the halving of North Sabah sales volume to 300K barrels as the company managed a single offtake vs. 2 in 2QFY22. Additionally, there was no sales offtake for Repsol asset’s Kinabalu production sharing contract (PSC).

• 3QFY22 revenue in the UK-based Anasuria dropped 41% QoQ as the previous quarter included an overlift volume of 90K barrels. However, the gross profit was included in 3QFY22, which boosted this segment’s net profit by 17% QoQ to RM20mil.

• We highlight that average daily net production decreased 21% QoQ to 4,695 barrels for North Sabah in 3QFY22 from unplanned production interruptions in January 2022 and an annual planned maintenance campaign in March this year.

• Likewise, Anasuria also experienced an average daily net production decline of 20% QoQ to 1,983 barrels in 3QFY22 due to a continuing production riser malfunction, which is now expected to be rectified in 3Q2022.

• In terms of realised crude oil prices, Anasuria managed to capture the upcycle much better with a 70% QoQ surge to US$122/barrel vs. North Sabah’s 19% increase to US$90/barrel in 3QFY22.

• While we expect the coming 4QFY22 to stage a sharp earnings recovery with an additional North Sabah shipment and the full contribution of Repsol assets (which doubles the group’s daily production to 18.5K boe and increase its 2P reserves by 72% to 81mil boe), sentiments could remain soft until actual earnings delivery against the backdrop of erratic production volumes. Hence, Hibiscus is likely to continue trading over the next quarter at an EV/2P reserve discount of 49% to its closest peer, UK-listed EnQuest and 59% to regional average (Exhibit 3).

Source: AmInvest Research - 26 May 2022