Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with a lower sum-of-parts-based (SOP) fair value of RM3.66/share (from an earlier RM3.90/share), which implies an FY20F PE of 38x – 17% below its 5-year peak of 46x. Our SOP values the 650-acre buffer land in Pengerang at RM80 psf.

• We have cut FY19F-FY21F earnings by 6%-7% from lower engineering, procurement, construction and commissioning (EPCC) revenue assumptions due to the reduction in Pengerang Deepwater Terminal (PDT) Phase 2’s tank capacity by 38% to 1.3mil cu metres from 2.1mil cu metres.

• Recall that the group has a 25% stake in Pengerang Terminals 2, while Petronas has 40%, Vopak 25% and the Johor state 10%. Back in 2014, the joint-venture partners planned to build a facility to handle, store and distribute crude oil, petroleum, chemical and petrochemical feedstock, products and by-products to and from the Refinery & Petrochemical Integrated Development (RAPID) complex, which will have a deepwater jetty with 11 berths.

• We understand that the capacity for the storage facilities has been scaled down for now according to Petronas’ new requirement late last year. While Phase 2’s lowered capacity remains on track to be completed and commissioned by the middle of this year, the construction of the remaining 800,000 cu metre storage is uncertain at this stage.

• The group was awarded an EPCC contract to build the facilities worth RM5.5bil, based on the earlier capacity of 2.1mil cu metres which was to have cost RM6.3bil. Assuming the fabrication cost of tank storage at RM1,000/cu metre, we estimate that the EPCC contract value has only dropped by 15% to RM4.7bil, which includes land reclamation and common infrastructure.

• Besides the scale-down in Pengerang 2 capacity, Dialog’s intention to take up minority stakes in petrochemical plants in the Pengerang development has raised concerns on the group’s exposure to cyclical commodity prices.

• As highlighted in our report on 15 November last year, we view the worries as overblown given that the new possibilities represent a natural evolution for the group to expand its recurring income base, allowing Dialog to leverage EPCC and specialist/maintenance services, which will further drive its topline growth. In our view, the current management has demonstrated savvy strategic changes while retaining its prudent business model over the years.

• These issues do not negate PCT’s superlative advantage as the sole transportation access point for Petronas’ RAPID and the greater Pengerang Integrated Petroleum Complex, which covers 20,000 acres. Further expansions are still in the pipelines as Dialog’s MoU with the Johor state to develop Pengerang Phase 3 in April last year covers 300 acres of reclaimed land, almost 2x PDT 2’s 157 acres.

• We view Dialog’s above-peer FY20F PE of 30x, 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 - 16 Jan 2019