KUALA LUMPUR (Feb 5): AmInvestment Bank Research has initiated coverage of Hibiscus Petroleum Bhd at 58 sen, with a "buy" rating and a fair value (FV) of 79 sen, as it sees that the stock is trading at a steep discount below its peers.

In a note today, its analyst Alex Goh said based on enterprise value of the group’s existing proven and probable (2P) reserves, Hibiscus is currently only trading at US$4.80 (RM19.56)/barrel — a steep discount of 42% below its closest peer, UK-listed EnQuest, and 60% below the regional average.

“This is compelling given the group’s project-funded productivity enhancement programmes amid a more optimistic crude oil price environment.

“Additionally, Hibiscus is listed on the FTSE4Good Bursa Malaysia Index with the highest four-star environmental, social and governance (ESG) rating, which ranks among the top 25% in the FBM Emas Index,” he added.

He said Hibiscus' current FV is offering a compelling upside potential of 36%.

“This implies an enterprise value/2P valuation of US$6.10 per barrel — at discounts of 26% to EnQuest’s US$8.30 per barrel and 45% to the regional average of US$11.20 per barrel,” he said.

Goh also noted Hibiscus' current 2P net reserves of 46.1 million barrels in North Sabah and the UK account for half of Sapura Energy Bhd-OMV’s largely gas-based 92.3 million barrels of oil equivalents.

“However, in terms of oil reserves, Hibiscus’ 2P reserves are 7.7 times Sapura-OMV’s 6.2 million barrels,” he said.

According to Goh, the group’s plan to raise daily production from 9,000 barrels currently to 12,000 by 2021 has been deferred by two years due to the Covid-19 pandemic and the current low oil demand environment.

Additionally, he said, Dagang NeXchange Bhd’s (DNeX) acquisition of the remaining 60% stake in Ping Petroleum had re-prioritised Hibiscus towards its newly secured 70% interest in the Teal West field instead of the earlier Guillemot de-bottlenecking plan at the group’s 50%-owned Anasuria Cluster in the UK.

Meanwhile, based on an average crude oil price of US$50 per barrel estimated for the financial year ending June 30, 2021 (FY21) and US$55 per barrel for FY22 to FY23 versus US$58 per barrel in FY20, Goh is projecting the group’s core net profit to decrease by 11% in FY21, and then organically increasing by 12% in FY22.

“The sharper FY23 earnings growth of 28% stems from an increase in Anasuria’s daily production by 2.2 times by the end of 2022, driven by Teal West’s maiden output.

“Thereafter, Hibiscus’ FY24 earnings are expected to double from a 32% increase in daily production, underpinned by a full-year contribution from Anasuria’s output expansion together with a 40% increase from North Sabah,” he said.

At 9.46am today, Hibiscus had risen two sen or 3.45% to 60 sen, valuing the company at RM993.24 million.