Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with unchanged forecasts and 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 attended Dialog’s AGM yesterday and came away with the impression that the group is aiming to diversify its earnings base from the engineering, procurement, construction and commissioning (EPCC), specialist/maintenance services, upstream and tank terminal businesses.

• The group’s executive chairman Tan Sri Ngau Boon Kean, indicated that Dialog may be exploring the possibility of taking up minority stakes in petrochemical plants which may be built in the Pengerang area, where the group’s major operations are currently being undertaken.

• In our view, this appears to be a natural evolution for the group to expand its recurring income base as such stakes allow Dialog to leverage EPCC and services operations, which will further drive its topline growth.

• While petrochemical earnings tend to move in cyclical trends in tandem with the olefin-naphtha spreads, this hinges on the offtake agreements with clients. For example, Formosa Petrochemicals’ (FP) margins tend to be more resilient vs. Lotte Chemical Titan’s as a large segment of FP’s production is taken up by its parent company.

• Hence, we are neutral on this potential development pending the announcement of actual contract negotiations which may be protracted as the Pengerang Deepwater Terminal (PDT) 3 is only expected to be completed in 3-4 years’ time. We highlight that the current management has demonstrated savvy strategic changes while retaining its prudent business model over the years.

• 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.

• We view Dialog’s above-peer FY20F PE of 32x, but below its 5- year peak of 46x, 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 - 15 Nov 2018