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SST royalty to Sabah likely to dent Hibiscus' FY23-FY25 earnings, says HLIB Research

KUALA LUMPUR: Hibiscus Petroleum Bhd's state sales tax (SST) on its two units operating in Sabah to the state government is expected to put a dent in its net profit in the financial years 2023 (FY23) and FY25, Hong Leong Investment Bank Bhd (HLIB Research) said.

HLIB Research trimmed Hibiscus' FY-FY25 net profit forecasts by six per cent, 12 per cent and 17 per cent, respectively, for an additional five per cent royalty payment annually to the Sabah state government in regards to the SST.

"With Hibiscus proposing to pay the Sabah state government, this resolves the SST debacle brought up in July 2022.

"We highlight that this is at a discount to the initial sum of RM97.3 million (comprising RM66.0 million in SST and RM31.3 million in penalty incurred for late payment)," it said in a note today.

HLIB Research said Hibiscus has decided to incur both the Sabah SST expense (RM85.7 million) and the non-cash reversal of tax provision (RM125.5 million) in its previous fourth quarter (Q4) FY22 rather than in Q1 FY23.

With that, the research firm said the restated core net profit for Q4 FY22 and FY22 would be RM257.3 million and RM382.5 million, respectively, from RM217.5 million and RM342.7 million previously.

"Going forward, Hibiscus will move on with a clean slate.

"We are positive on this development as we believe there was a share price overhang previously, mainly due to the Sabah SST debacle," it said.

HLIB Research has maintained its 'Buy' call on Hibiscus, with a lower target price of RM1.54 compared to RM1.63 previously.

"Our target price is derived based on the net present value of all its producing assets' future free cash flows, after accounting for each asset's targeted lifespan.

"At about only 3x revised FY23 price-earnings ratio, we believe that Hibiscus is a compelling case and is conspicuously undervalued given its strong foothold in the upstream energy space," it added.

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