Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with an unchanged sum-of-parts-based (SOP) fair value of RM3.85/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.

• Yesterday, Dialog secured a 5-year groupwide master service agreement for integrated turnaround main mechanical and maintenance mechanical static services from Petronas, which has an option for extension.

• Currently, Dialog provides such plant turnaround and daily maintenance services to Petronas on shorter term contracts for individual plants separately.

• With this master service agreement on a longer duration, Dialog will be able to more effectively develop and expand its workforce towards servicing Petronas’ operations, particularly land-based plant facilities.

• Hence, we are positive on this development which provides improved visibility to Dialog's long-term recurring revenue, even though its past service contracts tend to be renewed on a consistent basis.

• However, we maintain our forecasts as management is unable to provide any guidance at this juncture for the potential increase in domestic-based service income.

• 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 reached progress stage of 62% for the 300-acre land reclamation of Pengerang Phase 3, which involves the construction of a petroleum/petrochemical storage and a third jetty at an indicative initial cost of RM2.5bil, in which Dialog holds an 80% equity stake and the Johor state 20%.

• This is in addition to 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 CY20F PE of 31x — 33% 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 Jul 2019