Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with unchanged forecasts and 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.

• Dialog together with executive chairman and substantial shareholder Tan Sri Ngau Boon Keat and Pengerang Independent Terminals Sdn Bhd are facing a legal suit from Teguh Kemajuan Sdn Bhd (Teguh) for conspiracy for unlawful or unjust enrichment.

• Teguh is the owner of a 55-acre land in Pengerang which was compulsorily acquired in April 2013 by the Johor state, which then subsequently granted development rights to the joint venture company comprising Dialog, Vopak Group and the Johor state.

• While the court has dismissed Teguh’s challenge to the compulsory land acquisition, the company is appealing to the Federal Court against the decision on January 2018 to award a higher land price than its original valuation.

• Teguh is now claiming US$1.4bil (RM5.6bil) as the projected profits which would be gained from the land development, as well as liability to all future income from the land. Excluding the compulsory land acquisition value which was earlier awarded, this claim alone translates to an unreasonable valuation of RM2,335 psf vs. only RM40–RM70 psf currently for industrial land in Pengerang.

• According to Dialog, which will be contending this claim, the legal suit is frivolous and an abuse of the court process. Hence, we do not expect the group to make any provision for liabilities to its future earnings.

• Meanwhile, 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, valueenhancing 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 33x, 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 - 2 May 2019