Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with a raised sum-of-parts-based (SOP) fair value of RM4.28/share (from an earlier RM4.10/share), which implies an FY21F PE of 35x – 22% below its 5-year peak of 46x. Our SOP maintains the 650-acre Pengerang buffer land valuation at RM80 psf.

• We have raised Dialog’s FY20F–FY22F earnings by 4%–5% on higher margin assumption for the group’s technical services & plant maintenance operations, as 2QFY20 EBITDA margin rose 5 percentage points (ppt) to 28% due to higher margins from ANZ and regional operations.

• The group’s 1HFY20 core net profit of RM294mil (+17% YoY) came in above our and market expectations, accounting for 50% of both our and street’s FY20F earnings. As a comparison, Dialog’s 1H accounted for 43%–47% of FY15–FY19 net profit. As expected, the group did not declare any 1HFY20 dividend.

• For core profit comparison, we have excluded Dialog’s 1QFY20 fair value gain of RM29mil from the group’s stake in Halliburton Bayan Petroleum following the acquisition of an additional 25% stake to 75%.

• Looking forward, we expect a stronger 2HFY20F with the maiden contribution from its 1.3mil m3 storage facilities in Pengerang Phase 2, which has been recently completed together with 120,000 m3 capacity from Tanjung Langsat 3. Additionally, the group’s expanded plant turnaround and maintenance work scope from Petronas’ 5-year group-wide master service agreement is likely to propel near-term earnings momentum.

• Dialog’s 2QFY20 core net profit rose 16% QoQ to a record RM158mil mainly due to the 5ppt expansion in EBITDA margin notwithstanding revenue contraction of 5% due to lower engineering, procurement and construction billings as Pengerang Phase 3 is still in the initial stages. The higher margin stemmed largely from a rebound in contributions from specialist products and services in ANZ and Asia. This higher overseas contribution caused the share of Dialog’s earnings from Malaysia to drop to 84% from 92% of 1QFY20 and 89% in FY19.

• Even after Pengerang Phase 3 is completed, 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 180,000 m3 to 300,000m3.

• Dialog trades at a CY21F PE of 27x – 41% 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 - 14 Feb 2020