Investment Highlights

• We maintain BUY on Hibiscus Petroleum (Hibiscus) with an adjusted sum-of-parts based fair value (FV) of RM3.30/share (4% reduction from RM3.44/share previously) to incorporate the following:
  
  i. prudent approach to earnings from ongoing oi development projects including South Furious 30 (SF30 Water Flood Phase 2 by 3QCY24 with net oil production o 1k barrels per day (bbl/day) and Teal West by Dec 2025 with net oil, condensate and gas production of 4k bbl/day
  
  ii. increase in net oil production of 450 bbl/day for the Peninsular Hibiscus PSC after successful first oil from the Bunga Aster-1 discovery earlier this month; and
  
  iii. higher natural decline rate of 10% to its average gross oil condensate and gas production per day (vs. 5-7% previously) – in line with management guidance.

• This implies an enterprise value (EV)/proven and probable reserves (2P) valuation of US$7.54/bbl vs. EnQuest's US$7.44/bbl and the regional average of US$8.17/bbl (Exhibi 6).

• Our FV also reflects a 1-notch downward revision in our ESG rating to 3 stars due to its sole exposure to the traditional oil & gas production business and the mino proportion of 2P gas reserves of 11mil barrels of oi equivalent (MMboe) which accounts for only 19.4% of total ne 2P reserves.

• Hibiscus’ 9MFY24 core net profit (CNP) of RM390.9mi (excluding write-offs for well exploration costs, overprovision of tax and unrealised forex gains) exceeded expectations a 88% our earlier full-year forecast and 86% of consensus’.

• We expect to see a sequentially weaker quarter ahead despite a higher offtake of 2 MMboe and resilient prices (note benchmark crude oil prices trended at US$85-95/bbl during 2QCY24), due to pending maintenance activities for all assets which saw 3QFY24 net operating expenditure (OPEX)/bbl a 20%-45% below FY23 normalised levels.

• The group declared a third interim dividend per share (DPS of 2 sen, bringing 1HFY24 to 6 sen. This translates to a payou of 13%. Hibiscus intends to distribute a minimum FY24F DPS of 7.5 sen, which represent a 30% increase after a 1:2.5 share consolidation exercise in October 2023.

• Accordingly, we raised FY24F/FY25F/FY26F earnings by 19%/29%/38% to account for a higher offtake volume o 7.8MMboe, revised expectation of first oil timeline and resilient product prices.

• YoY, the group’s 9MFY24 revenue rose by 7% due to broadly stronger offtake, particularly from the Commercial Arrangement Area (CAA) whose volume of crude oil sold rose by 30%. 9MFY24 CNP increased higher by 10% despite EBITDA margins staying flat from a lower effective tax rate (ETR), which declined by 11-pts due to overprovision of tax and net interest expense.

• QoQ, Hibiscus’ 3QFY24 revenue saw a minor decline of 3.8%, in line with a flattish offtake performance as stronger sales from Anasuria Hibiscus were offset by a 12%-14% decline from both North Sabah and Peninsular Hibiscus PSCs. 3QFY24 CNP was more positive with a 7% increase as core EBITDA improved by +11-pts to 62.8% due to lower net operating expense (OPEX)/boe at all assets from deferral of maintenance activities.

• We continue to like Hibiscus, premised on our positive outlook for near-term oil demand and expect to see the group’s daily average net oil, condensate, and gas production increase by ~26% over the next 3 years, which will ensure earnings resilience.

• Moreover, the group targets to reach a daily production of 35K-50K boe/day by 2026 from 21k boe/day currently, which hinges on an aggressive pipeline of exploration and development opportunities within the existing portfolio as well as the addition of new assets via acquisitions and bidding of new licenses.

• Currently, Hibiscus is trading at an appealing EV/2P reserve of US$5.01/boe, a discount of 33% to its closest peer, UK-listed EnQuest, and 39% to the regional average.

Source: AmInvest Research - 23 May 2024