Investment Highlights

• We maintain BUY on Dialog Group with an unchanged sumof-parts-based (SOP) fair value of RM4.80/share, which implies a CY22F PE of 36x —below its 5-year peak of 39x. This is partly based on our valuation of the 650-acre Pengerang buffer land valuation at RM80 psf.

• Our FY21F net profit has been marginally tweaked as we view Dialog’s 1HFY21 core net profit of RM256mil as generally in line with expectations, despite the results accounting for 41% of our and consensus’ FY21F earnings. As a comparison, the group’s 1H accounted for a higher range of 43%–48% of the FY16–FY20 core net profit.

• We expect a stronger 2HFY21 as the group’s 2QFY21 associate contribution fell by 63% QoQ to RM28mil mainly due to a higher lumpy deferred tax provision of RM40mil arising from its 25%-owned Pengerang Phase 2 development.

• Operationally, Dialog’s 2QFY20 EBITDA rose 29% QoQ to RM155mil in tandem with revenue increasing by 6% QoQ on higher domestic and Asian contributions, notwithstanding Covid-19 movement restrictions which slightly delayed the group’s activities.

• However, the lower deferred tax-impacted associate contribution together with a 2.2 percentage-point increase in effective tax rate to 8.7% caused 2QFY21 core net profit to decrease by 10% QoQ to RM122mil.

• We estimate that normalising associate contributions by excluding the deferred tax provision would translate to 2QFY21 core net profit increasing by 20% instead.

• With the initial segment of Pengerang Phase 3 expected to commence in mid-2021, we expect the group’s core earnings to remain on the upward trajectory. This will be further underpinned 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.

• Towards the end of 2021, 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.

• Dialog currently trades at a FY22F PE of 25x – well below its 5-year peak of 39x. We view its higher-than-peer premium as justified given Dialog’s long-term recurring cash flowgenerating businesses underpinned by the Pengerang development’s multi-year value re-rating bonanza and low net gearing levels.

Source: AmInvest Research - 10 Feb 2021