WHAT’S NEW

Dialog acquired the remaining 20% of Dialog Terminals Sdn Bhd, which comprises the storage terminals - Langsat Terminal (One) (LGT1) and Langsat Terminal (Two) (LGT2) - from Puma Energy. Puma Energy is owned by Trafigura, a global energy trader and the main offtaker. The purchase consideration is RM62.6m. Dialog will also assume Puma’s shareholders’ loan and principal/accrued interest of RM24.3m and RM8.1m respectively, resulting in a total consideration of RM95m. Dialog had earlier acquired MISC’s 36% net stake for RM193m. Going forward, Dialog will have 100% ownership of the terminals and the Langsat Terminal (Three) (LGT3). As of 2016, both terminals continued to generate steady income from 42 oil storage tanks, with all of its total capacity of 647,000cbm contracted to customers, mainly based on long-term, take-or-pay contracts. LGT3 is planned for an additional storage capacity of 300,000cbm.

COMMENT

• Acquisition price in line with global valuations. The consideration implies: a) about 8x EV/EBITDA, which is at the lower range of global M&A multiples of 9-26x; and b) 10-14x PE (based on RM63m equity consideration and our assumption of annual net profit of RM20m-30m at full utilisation). This is also in line with the consideration paid for MISC’s stake. In the past, LGT1 and LGT2 had an upward revision in storage rates from
• We are neutral on the acquisition. The full ownership will also allow Dialog to decide on further terminal expansion and negotiations with the main customers. Although the expansion is slightly behind target, the Tanjung Langsat terminals are expected to house 2m cbm of storage capacity by 2020. Our forecasts also already assumed the said maximum capacity expansion from 2020. Nevertheless, we are overall neutral because we are unclear why Puma is exiting the terminal investment and whether Trafigura will remain as a key customer. According to Trafigura, tough market conditions and fierce competition caused its group PBT to decline by 11% yoy in 2017 despite a 39% rise in revenue. The global trader also aims to reduce its gearing position. There are concerns that the Langsat terminals may compete with the neighbouring Pengerang while both terminals are expanding, although we understand the terminals will service different products and vessel sizes. It is also unclear if Dialog will have full control over Tanjung Langsat Port (under JohorCorp), which is also a key component for the terminal’s business. Also, recent reports suggest Pengerang utilisation and rates had declined from the high base in the past few years.
• Slight upgrade in earnings forecasts by 1-2%. The additional 20% ownership is expected to boost Dailog’s FY19-20 net profits by 1% and 2%. There is minimal impact on FY18 forecast, given that the deal is closed at the end of the financial year-end of FY18. Dialog is expected to gear up to fund the consideration but is within our forecast of an increase to 0.2x (currently 0.1x).
• Upgrade target price to RM3.00 (from RM2.95). At implied 35x FY19F PE, we increase the Langsat terminal DCF by 14% to RM0.42/share after raising the stake to 100%. Our valuation for Pengerang Phase 1 (46% stake) and Phase 2 (25% stake) is at RM0.67/share. We continue to input a RM0.38/share Phase 3 ‘option value’ (assumptions: 40% success rate, investment cost >RM5b on maximum capacity of 5m cbm developed in phases over 8 years, IRR: 18%, WACC: 7.8%, JV stakes at 25-47%. Phase 3 is undergoing land reclaimation process (executed by Penta-Ocean) within the next 2 years.
• Maintain HOLD. We like Dialog’s defensive business model, with a recurring downstream income stream and its upstream assets are also benefitting from the oil price recovery. Nevertheless, its current valuation has priced in most expansion angles, unless the company can continuously deliver major earnings upgrades. Our current target price excludes other longer-term upside, such as: a) further expansion of Phase 1 to 2.3m cbm capacity; and b) the buffer zones (two additional jetties). Dialog’s total Pengerang capacity can reach up to 10m-15m cbm (a total of 3-5 jetties). These expansion angles may take a long time to materialise. We still believe these huge expectations of the expansion plans, and the stock’s re-rating as a potential KLCI component, can be supported if the company can continue to deliver major earnings upgrades to support its already rich valuations. Entry price is RM2.70.

Source: UOB Kay Hian Research - 11 Jun 2018