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.

• Dialog’s FY20F–FY21F earnings are maintained as the group’s FY19 net profit of RM536mil came in within our expectations but above consensus by 6%. However, the final dividend of 2.3 sen, which translates to an FY19 DPS of 3.8 sen, was 0.3 sen above our assumption.

• We introduce FY22F earnings forecasts with a steady growth of 10% from the full contribution of the initial 430,000 m3 BP Singapore storage facility at the Pengerang Phase 3 development, which is scheduled for completion in mid-2021.

• Dialog’s FY19 net profit growth of 21% YoY was driven mainly by associate contributions of Pengerang Phase 1 storage facilities and Phase 2’s regassification plants, supported by local plant maintenance work. However, the group’s 4QFY19 net profit slid minimally by 2% QoQ to RM144mil due to lower market-driven tank utilisation at the Pengerang Phase 1 independent terminal.

• Even with the completion of Phase 2 development soon, we expect firm FY20F earnings momentum from the maiden contribution of the 1.3mil m3 storage facilities coupled with Tanjung Langsat 3’s initial 100,000 m3 capacity and expanded plant turnaround and maintenance work scope from Petronas’ 5-year groupwide master service agreement, which was signed last month.

• Notwithstanding Dialog’s extensive overseas operations, the group’s main earnings driver still stems from Malaysian operations which account for 89% of 9MFY19 pre-tax profit, up slightly from 87% in FY18.

• The group expects to complete the 300-acre land reclamation of Pengerang Phase 3 by the end of this year. Dialog will subsequently phase in the construction of petroleum/ petrochemical tanks and a third jetty at an indicative initial cost of RM2.5bil, in which the group will have an 80% equity stake and the Johor state 20% for common tankage facilities and jetty.

• Even after Phase 3, the group still has ample acreage to further double its Pengerang storage capacity with a remaining 500- acre zone comprising further reclaimable land and the adjoining buffer zone. Also, Dialog will be expanding its Langsat Terminal 3 by another 200,000 m3 to 300,000m3.

• Dialog trades at a CY20F PE of 34x – 26% 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 and a healthy net cash balance.

Source: AmInvest Research - 16 Aug 2019