Investment Highlights

• We upgrade our recommendation on Dialog Group to BUY from SELL by switching back to a sum-of-parts-based (SOP) fair value of RM3.80/share (from RM2.11/share based on a P/BV of 3x), which implies an FY21F PE of 32x – at parity to its 5-year average. Our SOP maintains the 650-acre Pengerang buffer land valuation at RM80 psf.

• We maintain Dialog’s forecasts as its 9MFY20 core net profit of RM445mil (+13% YoY) was in line with our expectations but slightly above consensus. While Dialog conservatively declared an interim dividend of 1.2 sen (-0.3 sen YoY) despite the stronger results, we have not revised our dividend payout assumptions.

• As our FY20F net profit is 6% above consensus, Dialog’s 9MFY20 core earnings accounted for 72% of our and 76% of street’s FY20F. As a comparison, Dialog’s first 9 months accounted for 70%–74% of FY17–FY19 net profit.

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

• Against the backdrop of strong demand for storage facilities driven by the current oil glut, we maintain a stronger FY21F earnings outlook given the full-year contribution of the fully utilised 1.3mil m3 storage facilities in Pengerang Phase 2, additional 430,000 m3 capacity from Phase 1, and Tanjung Langsat 3’s 120,000 m3 tanks. Although maintenance services may be crimped by lower plant utilisation rates, Dialog’s expanded plant turnaround and maintenance work scope from Petronas’ 5-year master service agreement still supports longer term earnings momentum.

• Dialog’s 3QFY20 core net profit slid 4% QoQ to RM151mil mainly due to lower engineering, procurement and construction billings as Pengerang Phase 3 is still in the initial stages. This dragged its Malaysia-based revenue by 19% QoQ to RM264mil. Together with a 35% QoQ decline in overseas sales, these resulted in group revenue sliding by 18% QoQ.

• Despite lower revenues, the maiden contributions from the wholly-owned Tanjung Langsat 3 terminal drove 3QFY20 EBITDA margin by 2ppt QoQ to 30%. Together with higher associate contributions, the share of Dialog’s earnings from Malaysia rose to 92% in 9MFY20 from 90% in 9MFY19.

• Even after Pengerang Phase 3 is completed, the group still has ample acreage to 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 currently trades at a CY21F PE of 26x – 17% below its 5- year average of 32x. We view its higher-than-peer premium as justified given Dialog’s long-term recurring cash flow-generating businesses, further underpinned by the Pengerang development’s multi-year value re-rating bonanza and a healthy net cash balance.

Source: AmInvest Research - 15 May 2020