Investment Highlights

• We maintain BUY on Dialog Group with unchanged forecasts and sum-of-parts-based (SOP) fair value of RM3.75/share, which reflects a neutral 3-star ESG rating. This also implies an FY22F PE of 32x, near its 5-year average of 31x. This is partly based on a RM60 psf valuation of the 650-acre Pengerang buffer land.

• Dialog has entered into an agreement with HK-listed Morimatsu Technology and Service Company (MTS) for a 49:51 joint venture to provide one-stop engineering and fabrication services of critical process equipment, pressure vessels and modular plant/facility solutions for local and international customers in Pengerang, Johor.

• This will be based at Dialog’s existing 127-acre facility in Pengerang in which the group has developed and is currently expanding its deepwater terminal and storage facilities. Dialog is already providing fabrication services of offshore structures, storage tanks, sphere tanks, LPG bullet tanks, pressure vessels, structural steel and pipes for clients in the area.

• MTS, which has a market capitalisation of US$1.4bil, is a pressure equipment manufacturer and provider of integrated pressure equipment solutions offering traditional and modular pressure equipment.

• Founded in Japan, MTS’s strong market position is also supported by European technology and an existing production plant in China. It also provides value-added services associated with the pressure equipment in industries such as chemical, pharmaceutical, personal care chemical, mining and metallurgical, oil & gas and electronics.

• Given Dialog’s relatively small RM7mil investment outlay out of the total RM14mil, we do not expect any significant impact to the group’s earnings or low net gearing levels. Nevertheless, we are mildly positive on this JV, which highlights the attraction and growing activities of the massive Pengerang development, driven by Petronas-Saudi Aramco JV’s US$27bil Refinery and Petrochemical Integrated Development, expected to start operations progressively from the end of this year.

• Additionally, the full-year contribution of Dialog Pengerang Phase 5’s 430K cubic metre (m3) capacity together with Tanjung Langsat 3 terminal's additional 85K m3 capacity by the end of 2021 are likely to drive the group’s earnings growth trajectory in FY22F against the backdrop of rising global economic activities in tandem with rising Covid 19 vaccination rates. 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 22x, well below its 5-year peak of 40x. We believe Dialog deserves above-peer premium valuations given its long-term recurring cash flow-generating businesses which are further underpinned by the Pengerang development’s multi-year value re-rating bonanza and low net gearing levels.

Source: AmInvest Research - 30 Aug 2021