Investment Highlights

• We maintain BUY on Dialog Group with an unchanged forecasts and sum-of-parts-based (SOP) fair value of RM3.75/share, which reflects a neutral ESG rating of 3 stars. This also implies an FY23F PE of 32x, near its 5-year average of 31x.

• Petronas Gas’ 65%-owned Pengerang LNG (Two) (PLNG2) has invited prospective contractors to submit non-binding expressions of interest (EoI) to utilise a proposed new tank with a preferred capacity of 160K cubic metres on a 20-year commercial lease agreement. Recall that Dialog has a 25% equity stake in PLNG2 while the remaining 10% is held by the Johor state government.

• The EoI aims to enable PLNG2 to assess the feasibility of constructing a third LNG storage tank at its existing and operational Pengerang LNG import facility in Johor. Subject to achieving final investment decision, the new storage tank is expected to be completed by 4Q2025 at the earliest.

• Upstream reported that while the preferred usable capacity of the new tank is 160K cubic metres, bidders can propose different sizes of between 160K and 260K cubic metres.

• Based on PLNG2’s preferred tank size and contract term of 20 years, the indicative annual fee would be US$24.1mil annually for third-party usage. The successful contractor would secure 50 berthing slots per year for LNG carriers from 2025 through 2030 and 36 slots annually from 2030 onwards.

• PLNG2’s facilities include 2 LNG storage tanks, which commenced operations on Nov 2017 with a capacity of 400K cubic metres, regasification throughput of 490 million cubic feet per day and other ancillary services such as reloading, gassing up and cooling down.

• Based on the PLNG2’s capex of RM2.7bil for its current facilities, we estimate that an additional 160K LNG tank could cost RM1bil given the high current raw material costs albeit without a regasification component. Assuming operating costs at 10% of revenue, the project IRR translates to a minimal 5.5%, which translates to negligible NPV accretion to the group. Hence, we are neutral on this potential capacity expansion at this stage.

• Notwithstanding a weak pandemic-impacted 4QFY21 earnings performance (-19% YoY), we remain positive on Dialog’s long-term prospects given that 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 end-2021 are expected to drive its 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 an attractive FY23F PE of 25x, 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 - 29 Oct 2021