Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with an unchanged sum-of-parts-based (SOP) fair value of RM2.45/share, which implies a CY18F PE of 35x – 24% below its 5-year average.

• We maintain our FY18F-FY20 for now pending completion of the acquisition of an effective 36% equity stake in the group’s Tanjung Langsat tank terminals in Johor, which is estimated to raise our FY19F-FY20F earnings by 4%.

• Dialog has entered into a share purchase agreement to acquire the remaining 45% equity stake in Centralised Terminals S/B (CTSB) for RM137mil cash from MISC and assume its RM56mil shareholder loan, expected to be completed within a month.

• CTSB has an 80% equity stake in a total storage capacity of 647,000 m3 (directly owned by Langsat Terminal (LGT) 1 and 2) while Trafigura the remaining 20% (See Exhibit 2). CTSB also owns a 100% equity interest in currently dormant LGT 3.

• Recall that Dialog did not proceed with the expansion of 380,000 m3 under LGT 3 back in 2012 as the depth of the port was not dredged as agreed with the Johor port authorities.

• Operational since 2009, the existing tanks under LGT 1 and 2 are currently fully utilised on term contracts, and strategically located near the busiest international shipping lane in Singapore, between Middle East and Asia.

• Both terminals are part of the storage and trading hub for oil and gas in Johor and are also in the vicinity of one of the largest refining and petrochemicals, trading and storage centres in Asia. The LGT 1 and 2 terminals have been included by oil agency Platts for its FOB Straits oil price assessment process.

• Based on Dialog's net cash of RM2mil as at 30 June 2017 and the net debt of RM200mil in CTSB, we estimate that the group's net gearing will be minimal at 0.01x as at end-FY18F. Hence, the acquisition will be easily funded by the group via internal funds and external borrowings.

• Assuming that Dialog proceeds with the expansion via LGT 3, we estimate that an 80% stake in an additional 380,000 m3 could add 11 sen or 5% to Dialog's SOP.

• All-in, we are positive on this value-accretive acquisition which also expands its equity ownership and assumes control of the existing tank terminals built by the group while enabling faster decision-making for Langsat 3 expansion.

• Dialog now trades at a CY18F PE of 28x, below its 5-year average of 46x. We view the premium valuation as justified given Dialog’s sustainable recurring cash flow-generating businesses, which are largely cushioned from volatile crude oil price cycles, and further underpinned by the Pengerang development’s multi-year value expansion.

Source: AmInvest Research - 26 Sept 2017