Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with a higher sum-of-parts-based (SOP) fair value of RM3.85/share (from an earlier RM3.66/share), which implies an FY20F PE of 36x – 22% below its 5-year peak of 46x. Our SOP values the 650- acre buffer land in Pengerang at RM80 psf.

• We have raised Dialog’s FY19F earnings by 3%–9% from higher margin assumptions for its Malaysian operations and associate contributions as the group’s 9MFY19 net profit of RM395mil (+20% YoY) came in above expectations, accounting for 81% of our earlier FY19F net profit and 83% of consensus.

• Our earnings revision is not entirely surprising as we had indicated the likelihood in our results update on 15 February 2019 due to lumpy cost contingency write-backs for the construction of the RM6.3bil Pengerang Deepwater Terminal (PDT) Phase 2.

• However, Dialog’s 3QFY19 associate/JV contributions, which accelerated 40% QoQ and 80% YoY to RM57mil from the completion of PDT 1 storage tanks and the PDT 2 regassification plant, were stronger than our earlier assumptions.

• As a comparison, 9MFY16–9MFY18 core earnings accounted for only 70%–74% 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. However, Dialog’s interim dividend of 1.5 sen (+0.1 sen YoY) was within our expectations.

• Dialog’s 3QFY19 net profit rose 5% QoQ to RM144mil mainly due to the strong associate/JV increase, notwithstanding a 3.5ppt QoQ EBITDA decline. Even though the completion of Phase 2B is expected by June this year, we understand that cost contingency write-backs could taper off in 4QFY19, which could be offset by the growing associate/JV earnings base.

• Notwithstanding Dialog’s extensive overseas operations, the group’s main earnings driver still stems from Malaysian operations which account for 90% of 9MFY19 pre-tax profit, up from 87% in 9MFY18.

• The group has already reached progress stage of 62% for the 300-acre 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% for common tankage facilities and jetty. This is in addition to a 500-acre zone comprising further reclaimable land and the adjoining buffer zone. Also, Dialog will be expanding its dormant Langsat Terminal 3 into a 300,000 m3 storage facility.

• Dialog trades at a CY20F PE of 29x — 37% 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 multiyear value re-rating bonanza and a healthy net cash balance.

Source: AmInvest Research - 15 May 2019