Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with a higher sum-of-parts-based (SOP) fair value of RM4.10/share (from RM3.85/share), which implies a rolled forward FY22F PE of 36x – 22% below its 5-year peak of 46x. Our SOP maintains the 650-acre Pengerang buffer land valuation at RM80 psf.

• Dialog’s FY20F–FY22F earnings have been raised by 6%–8% from a 5-percentage point increase in the group’s technical/specialist/ maintenance services segments. As expected, the group did not declare any 1QFY20 dividend.

• Dialog recognised a fair value gain of RM29mil from the group’s stake in Halliburton Bayan Petroleum following the acquisition of an additional 25% stake to 75%. Excluding this gain, Dialog’s 1QFY20 core net profit of RM136mil appears to be within expectations, accounting for 25% of our FY20F earnings and 23% of consensus.

• However, the group’s earnings tend to gather momentum towards the second half of the financial year given that the first quarters of FY17–FY19 accounted for 18%–21% of their respective years.

• We expect this trend to continue in FY20F with the maiden contribution from the 1.3mil m3 storage facilities in Pengerang Phase 2, which has been recently completed, while the group’s expanded plant turnaround and maintenance work scope from Petronas’ 5-year groupwide master service agreement is likely to support near-term earnings momentum. This will also be further contributed by Tanjung Langsat 3’s initial 100,000 m3 capacity.

• Dialog’s 1QFY20 core net profit slid 3% QoQ mainly due to lower profit recognition in the engineering, procurement, construction and commissioning segment given the intercompany earnings of the group’s current 80% equity stake in Pengerang Phase 3 (while the Johor State holds the remaining 20%), in which the 300-acre land reclamation work is scheduled for completion by the end of 2019.

• Notwithstanding Dialog’s extensive overseas operations, the group’s main earnings driver still stems from Malaysian operations which account for 93% of 1QFY20 pre-tax profit, up slightly from 89% in FY19 and 87% in FY18.

• Even after Pengerang 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 CY21F 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 multi-year value re-rating bonanza and a healthy net cash balance.

Source: AmInvest Research - 12 Nov 2019