Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with an unchanged sum-of-parts-based (SOP) fair value of RM3.90/share, which implies a rolled forward FY20F PE of 38x – 15% below its 5-year peak of 46x. Our SOP values the 650- acre buffer land in Pengerang at RM80 psf.

• We maintain Dialog’s FY19F-FY20F earnings as its 1QFY19 net profit of RM115mil came in within expectations, accounting for 23% of our FY19F net profit and 24% of street’s. As a comparison, 1QFY16–1QFY18 earnings accounted for 17%– 21% of their respective years. Dialog did not declare any interim dividend, as expected.

• For comparison of core earnings, we have excluded the 2QFY18 exceptional fair value gain of RM66mil from the acquisition of an effective 36% equity stake in the Tanjung Langsat tank terminals in Johor for RM137mil cash from MISC.

• Dialog’s 1QFY19 core net profit rose 20% YoY mainly due to the recognition of Pengerang Deepwater Terminal (PDT) 1 and the LNG regassification plant, which commenced operations in November 2017. This was partly offset by lower progress work recognition for the final stages of Pengerang Deepwater Terminal (PDT) Phase 2.

• Excluding a RM10mil gain from the disposal of a petrol station in 4QFY18, the engineering, procurement, construction and commissioning works for PDT2 mainly drove Dialog’s 1QFY19 net profit up by 9.3% QoQ.

• Notwithstanding Dialog’s extensive overseas operations, the group’s main earnings driver still stems from domestic operations which account for 88% of 1QFY19 pre-tax profit, notwithstanding a drop from 95% in 1QFY19.

• The group’s progress on the RM6.3bil PDT Phase 2 is on track as the RAPID complex remains on schedule with progressive completion beginning from early 2019. In April 2018, the group signed a memorandum of understanding with the Johor state government to develop Pengerang Phase 3, which involves the construction of petroleum/petrochemical storage and a third jetty at an indicative initial cost of RM2.5bil, in which Dialog will have an 80% equity stake and the Johor state 20%.

• We expect the subsequent investments by other joint-venture partners to reduce Dialog's stake while boosting Phase 3's total investment value given that Phase 2 has already reached RM7.8bil in a reclaimed area which is half the size of Phase 3. This will be part of a 500-acre zone comprising further reclaimable land and the adjoining buffer zone. Additionally, Dialog will be expanding its dormant Langsat Terminal 3 into a 300,000 m3 storage facility.

• Dialog trades at a FY20F PE of 32x, below its 5-year peak of 46x. We view its higher-than-peer premium as justified given Dialog’s long-term recurring cash flow-generating businesses, which are largely cushioned from volatile crude oil price cycles, and further underpinned by the Pengerang development’s multi-year value re-rating bonanza together with a healthy net cash balance.

Source: AmInvest Research - 13 Nov 2018