Investment Highlights

• We maintain BUY on Dialog Group with a higher sum-of-partsbased (SOP) fair value of RM4.85/share (from RM3.80/share), by raising our target PE multiples for the group’s recurring specialist/maintenance services to 25x from 20x while rolling forward to FY22F. This implies an FY22F PE of 37x – 1 standard deviation above its 5-year average of 32x. Our SOP maintains the 650-acre Pengerang buffer land valuation at RM80 psf.

• Against the backdrop of strong demand for storage facilities driven by the current oil glut, we maintain our forecasts, which are 6%-9% above consensus, underpinned by 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.

• The group’s maintenance services have not been substantively impacted by the ongoing movement control order which has slightly constrained workers’ activities for around 2 weeks without incurring any additional expenses. We understand that refineries and chemical plants have not delayed scheduled maintenance activities, even though utilisation rates may be lowered by reduced offtake amid the Covid-19 pandemic.

• For the group’s integrated technical services, Dialog’s expanded plant turnaround and maintenance work scope from Petronas’ 5-year master service agreement will provide the longer term earnings momentum.

• Notwithstanding the low oil price regime, Dialog’s 95%-owned Bayan enhanced oil recovery and 20% stake in the production sharing contracts for the matured D35, D21 and J4 in the Balingian province, off Sarawak, continue to remain in production. While future development plans are being reviewed, we understand that these upstream operations may be able to break even during the worst oil price drop in 2Q2020.

• However, Dialog’s main earnings growth prospects stem from the full-year contribution of Pengerang Phase 2’s 1.3mil m3 storage which commenced operation in 3Q2019 and Tanjung Langsat 3 terminal’s initial 120,000 m3 capacity, of which half commenced in October 2019 and the rest in January 2020.

• In another 12–15 months, Tanjung Langsat 3’s balance 85,000 m3 will be operational while an additional 100,000m3 will commence in 2022. Besides the initial income from Pengerang Phase 3A’s 430,000m3 upon completion by mid-2021, 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.

• Dialog currently trades at a FY22F PE of 29x – below its 5-year peak of 39x. 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 cash balance.

Source: AmInvest Research - 3 Jun 2020