Investment Highlights

• We maintain BUY on Dialog Group with an unchanged sum-ofparts-based (SOP) fair value of RM4.85/share, which 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.

• Our forecasts have been marginally adjusted as we remain sanguine on Dialog’s earnings resilience amid the Covid-19 carnage together with the ongoing oil price down cycle, following our teleconference with management last week. These are the salient highlights:

• Earnings growth for 4QFY20 and FY21F onwards will be driven by the full-year contribution of Pengerang Phase 1E’s 430K m3 storage, which commenced operation in 3Q2019 and Tanjung Langsat 3 terminal’s initial 120K m3 capacity, of which half commenced in October 2019 and the rest in January 2020.

• Tank terminal rates, up by 30%–40% from end-CY19 to S$6.50– 7.00/m3 currently, will boost the earnings of 10% of Pengerang Phase 1’s 650K m3 storage, which are on spot charters of up to 3 months. However, this could be partially offset by the recent contract renewal of the group’s 30%-owned Kertih tank terminal, which commenced operation in 2000, for another 10 years by Petronas at a rate which could be lower by 10%–20%.

• In 12–15 months, Tanjung Langsat 3’s balance 85,000 m3 will be operational while another 100,000m3 will commence in 2022. Thereafter, the group still has ample acreage to double its Pengerang storage capacity with a remaining 500-acre zone comprising reclaimable land and the adjoining buffer zone.

• The group has proactively reviewed its operating expenditures and cut salaries by 5%–25% beginning in April this year with the largest reductions borne by top-level executives as a precautionary measure amid expectations of lower service rates from multiple clients, who are bearing the brunt of the unprecedented viral crisis.

• Nevertheless, management has neither experienced cuts in service day rates nor cancellation of orders, although some delays occurred for the integrated technical services segment due to constrained workers’ activities for 2 weeks in April.

• Notwithstanding the low oil price regime, Dialog’s 95%-owned Bayan enhanced oil recovery and 20% stake in the productionsharing contracts for the matured D35, D21 and J4 in the Balingian province, off Sarawak, continue to remain in production. With a capex commitment of RM500mil, management expects breakeven under the worst-case scenario for these upstream operations.

• 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 and low net gearing levels.

Source: AmInvest Research - 16 Jun 2020