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 wholly-owned Dialog D & P S/B has entered into a share purchase agreement to acquire an additional 25% equity stake in Halliburton Bayan Petroleum S/B (HBP) for US$8mil (RM35mil) cash from Asia Energy Services, which will raise Dialog’s stake in HBP from 50% to 75%. This transaction is expected to be completed within 10 days while Halliburton will continue providing technical services to HBP.

• HBP is the independent technical service contractor for the oilfield services contract with Petronas Carigali to enhance the recoverable reserves from the Bayan field, offshore Bintulu, Sarawak. The 24-year service contract has a remaining term of 17 years until 2036.

• Based on HBP’s FY18 net profit of RM16mil, we estimate that Dialog is acquiring the additional HBP equity stake at a value accretive PE of 9x vs. 34x for the group’s FY20F currently.

• Based on an interest cost of 4% on the purchase cost, this translates to a minimal annual earnings addition of RM3mil, below 1% of FY20F net profit.

• Given Dialog’s low FY20F net gearing of 0.2x, the purchase price can be easily funded internally. As the JV has no debt, the balance sheet impact will be negligible.

• We are mildly positive on this acquisition despite the negligible earnings impact as this investment further expands the group’s upstream exposure. Nevertheless, the group’s longer term prospective earnings will still be largely driven by Dialog’s downstream operations in the plant maintenance and tank terminal operations.

• 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 it 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 multiyear value re-rating bonanza and a healthy net cash balance.

Source: AmInvest Research - 19 Aug 2019