Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with an unchanged sum-of-parts-based (SOP) fair value of RM3.66/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 maintain Dialog’s FY19F-FY20F earnings as its 1HFY19 net profit of RM251mil was largely in line with our expectations, accounting for 51% of our FY19F net profit but 54% of consensus. As 2QFY19 results included lumpy cost contingency write-backs for the construction of the RM6.3bil Pengerang Deepwater Terminal (PDT) Phase 2, there is a likelihood that we may raise our FY19F earnings forecast if 3QFY19 results remain as strong.

• As a comparison, 1HFY16–1QFY18 earnings accounted for 41%– 48% of their respective years. 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.

• Notwithstanding Dialog’s Malaysian revenue dropping by 14% QoQ, its 2QFY19 net profit rose 19% QoQ to RM137mil mainly due to the reversal of project contingencies for PDT Phase 2, as Phase 2A was completed in November 2018. This also drove contributions from associates/JV to rise 32% QoQ to RM41mil.

• With the completion of Phase 2B by June this year, we expect further write-backs of cost contingencies in 2HFY19. Additionally, the group benefited from stronger 2QFY19 overseas contributions, which climbed 37% QoQ to RM22mil.

• Notwithstanding Dialog’s extensive overseas operations, the group’s main earnings driver still stems from domestic operations which account for 88% of 1HFY19 pre-tax profit, down slightly from 89% in 1HFY89.

• The group has already reached progress stage of 30% for land reclamation of 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 any co-investments in petrochemical operations with multinational players to be associate-level, value-enhancing and internally funded without any equity-raising requirements. 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 - 15 Feb 2019