• We maintain BUY on Dialog with a sum-of-parts-based fair value (FV) of RM2.95/share, which implies 1-year forward P/E of 27x - 8% above its 10-year average of 25x. Our fair value also reflects a neutral 3-star ESG rating.
• We examine the impact of potential expansion of the group's tank terminal facilities in Pengerang, Johor following Petronas' recent decision to develop a biorefinery plant in Pengerang Integrated Complex (PIC) with partners Enilive S.p.A. and Euglena Co Ltd on 26 July 2024.
• The biorefinery plant is expected to begin construction in 4Q2024 with a target completion date of 2H2028. The plant will have the capability to process 650k tonnes per annum (tpa) of raw materials to produce sustainable aviation fuel (SAF) and other biofuels such as renewable diesel/hydrogenated vegetable oil (HVO).
• We believe this will occur through expansion of Pengerang Terminals Two (PT2SB) - a dedicated terminal for Petronas' Refinery and Petrochemicals Integrated Development (RAPID) complex. Recall that PT2SB still has sufficient buffer land of 104 acres for additional development.
• In our view, the group is likely to be awarded the contract latest by 4Q2026, assuming a construction period of 18 months. Hence, the expansion is not expected to contribute to FY26F earnings.
• Our estimate points to a 1% accretion to its SOP premised on the following assumptions: a. Tank terminal capacity of 180k cubic meter (m3) based on storage size of 650k tpa, b. Capex of RM300mil to be financed via a 70:30 debt-to- equity structure at WACC of 7%, c. Take-or-pay arrangement for 20 years at storage rates of RM27/m3-RM30/m3 per month, and d. IRR of 11% and payback period of 8 years.
• This is expected to increase FY27F net gearing by 2.8% to 14.4% - broadly within comfortable levels in our view as the group's financing commitments remain limited.
• Though the impact is minor due to Dialog's large asset base, there is a slight further upside, in our view, should the terminal incur a lower tax rate or receive investment tax allowances. Nevertheless, our analysis imputes a 24% corporate tax for prudence.
• Recall that under Budget 2024, the prime minister had proposed PIC to be made a hub for the chemical and petrochemical sectors through use of measures which we believe will come under the Johor-Singapore Special Economic Zone (JS-SEZ).
• We view the development positively despite its minor impact to the group as it is broadly in line with the group's ongoing approach for Dialog Terminals Langsat 3 (DTL3) and climate change strategy, which aims to grow revenue exposure in the sustainable and renewables sector. Note that DTL3 is an independent operating terminal with a storage capacity of 450k m3 serving short-to-medium term energy traders and multinational companies that store energy products.
• We double down on our long-term sanguine view on Dialog and continue to advocate the stock as an undervalued asset play. The group currently trades at a FY25F PE of 19x vs. its 10-year average of 25x.

Source: AmInvest Research - 23 Sep 2024