Investment Highlights

• We maintain BUY on Dialog Group with an unchanged sumof-parts based (SOP) fair value of RM3.66/share, which reflects a neutral ESG rating of 3 stars. This also implies a CY23F PE of 32x, near its 5-year average of 31x.

• Dialog entered into a conditional agreement with Canadalisted Pan Orient Energy Corp (POEC) to acquire the entire equity interest in POEC, for a cash consideration of US$38.7mil (RM170mil), 1% of the group’s market cap. Through POEC, Dialog is acquiring an effective 50% interest in Pan Orient Energy (Siam) (POES) which is the operator of Concession L53/48, onshore Thailand. The remaining half will still be held by Thai-listed Sea Oil.

• The L53/48 concession, which expires in 2035 with an optional 10-year renewal period, is located 100km northwest of Bangkok and consists of 7 onshore producing fields. POES produced 2,700 barrels of oil per day (bopd) in 2021, averaging 1,105 bopd in 1Q2022.

• Independent consultant Sproule International estimated that POES has 2P (proven and probable) oil reserves of 4.6mil barrels as of 31 Dec 2021, translating to a reasonable valuation of US$16.83/barrel which is at a 7% discount to the regional average of US$18/barrel (Exhibit 1).

• We are positive on this value-accretive acquisition as this onshore producing asset has been generating steady earnings and cash flows. In 1QFY22, the 50% stake generated a share of profit of C$4.4mil (RM15.4mil) and adjusted cash flow of C$5.7mil (RM19.9mil) with a realised oil price of C$123/barrel.

• Thus, assuming the deal is completed by 3Q2022, we estimate that the acquisition could increase Dialog’s FY23F core net profit by 9%, while raising its low FY22F net gearing of 24% currently to a still comfortable 27%. We maintain our forecasts pending the deal’s completion.

• Assuming a more conservative crude oil price of US$60/barrel, all-in opex including royalty and transport at US$12/barrel and effective tax rate at 50%, we estimate that the acquisition could add RM73mil or a negligible 0.4% to Dialog’s SOP. Nevertheless, the acquisition represents Dialog’s first venture into the upstream segment outside Malaysia which allows the company to move further up the value chain and synergise operations across its integrated operations.

• Dialog currently trades at an attractive CY23F PE of 21x, well below its 5-year mean of 31x. 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 - 8 Jun 2022