Hibiscus announced plans to undertake a free warrant issue on the basis of 1 for every 5 existing ordinary shares held, essentially expanding its share base by 20% upon full exercise of the said warrants. The instruments will carry a 3-year tenure, and with the exercise price also having a fixed 6sen step-up on each of the anniversary dates from the date of the first issuance. While potentially dilutive, we are leaving our sum-of-parts derived RM1.06 valuation unchanged for now given the potential uplift from the conversion of 2C to 2P reserves for the North Sabah field, which we have not accounted for in our computations. Our Outperform call on Hibiscus is affirmed, underpinned by on-going contributions from its Anasuria Cluster in the North Sea (valued at 58sen per share), and the on-coming contributions from the North Sabah EOR field (currently valued at 48sen per share) which has recently taken a significant step toward conclusion.
The exercise will raise approximately RM298.6m over the 3-year tenure of the warrant, based on the assumed illustrative 94sen per share conversion price, also accounting for the 6sen annual step-up. Proceeds raised are expected to be utilized for expansion and capital expenditure purposes, while also repaying borrowings (in future, if any). Management has cited that the exercise is not primarily intended for the purpose of raising funds, though the additional funds are much welcomed, but more as a means of rewarding entitled shareholders for their continuous support of the Group. While we can appreciate the rationale of such a move, we are not particularly enthused about the near-term expansion in its share base without immediately known mitigating benefits, though we acknowledge (and commend) management’s value-accretive moves to-date and continue to believe all interests will be preserved. The exercise is expected to be completed by 1H 2018, barring any unforeseen circumstances
Potential enhancement to value. Assuming a 50% conversion of the North Sabah field’s 2C contingent resources into 2P reserves, we are estimating the Group’s overall fair value to be bumped up to RM1.17 (post-dilution).
Source: PublicInvest Research - 11 Dec 2017
http://klse.i3investor.com/blogs/PublicInvest/141116.jsp
