KUALA LUMPUR: The heightened risk premiums from tax issues with the Sabah authorities will continue to weigh on Hibiscus Petroleum Bhd's sentiment for the time being, said Hong Leong Investment Bank Bhd (HLIB).

The Sabah state government recently demanded Hibiscus to pay a total sum of RM97.3 million, comprising RM66.0 million in sales and service tax (SST) and RM31.3 million in penalty incurred for late payment.

HLIB said Hibiscus consistently highlighted throughout the briefing that it had received a couple of written advice from its legal advisors that it did not need to pay SST on a few grounds.

The firm said from the tone of the key management team throughout the entire discussion, Hibiscus sounded rather bent on assessing its options rather than caving in to pay the SST. 

"The group views the total sum of circa RM70 million to be paid annually to be a pretty hefty sum (based on the assumption of US$100/boe lifting price) as it can be used in other meaningful ways.

"Based on our understanding, the total of RM66.0 million stems from a non-payment for its North Sabah oilfield. 

"However, Hibiscus has mentioned that the total figure is inaccurate and is very far off – but did not comment on a specific sum," it said. 

In regards to the termination of work passes, HLIB said Hibiscus expected operational hiccups to occur, but contingency plans were in place. 

Based on the firm's understanding, it said the work permits only affected non-Sabahan workers. Currently, 24 per cent of Hibiscus's total workforce are Sabahans. 

"So, even in a worst-case scenario, there will not be a complete shutdown of operations assuming work permits are not renewed. 

"However, the group expects capex and maintenance planning to be deferred and delayed if this problem persists in the long term," it said.

HLIB believes the entire debacle will require more time to solve and is inconclusive at the moment, pending further negotiations with the Sabah government.

The firm has maintained its "Buy" call on Hibiscus with a lower target price of RM1.54 per share after increasing the weighted average cost of capital (WACC) for both its FIPC Kinabalu Oil and North Sabah assets to 15 per cent (from 10 per cent previously).

"This is done to reflect the heightened risk premiums from this Sabah SST development, which we believe will weigh on the group's sentiment for the time being," it added.