Investment Highlights

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

• Our higher valuation is driven by:

• Assumptions for an additional 1mil cubic metres (m3) of storage for Dialog’s 45.9% stake in Pengerang Deepwater Terminal (PDT) Phase 1. In August this year, its partner Vopak announced that Phase 1 will be progressively expanded from 1Q2019 by 430,000 m3 for clean petroleum products, raising its total capacity by 33% to 1.7mil m3.

• Assuming that Phase 3, which Dialog is still in the process of negotiating with off-takers, will have the same storage capacity and equity stakes as Phase 2’s 2.1mil m3.

• Raising the valuation of Pengerang land from RM30 psf to RM50 psf for Dialog’s estimated stake of 65% in the larger 650-acre industrial and buffer zone. Note that property agents' asking price for industrial land in adjacent Sg Rengit in Pengerang has reached over RM100 psf currently.

• We have also raised Dialog’s FY18F-FY20F earnings by 5%-8%, incorporating higher contributions from Pengerang Phase 1 and an increase of RM100mil for the group’s FY18F-FY20F engineering, procurement and construction order book assumption.

• The RM5.5bil contract for the construction of the RM6.3bil PDT Phase 2 currently occupies Dialog’s fabrication, engineering and construction division, and underpins the group’s earnings over the next 2 years.

• The progress of PDT Phase 2 is on track as the RAPID complex remains on schedule with progressive completion in 2018- 2019. Additionally, the RM2.7bil LNG regasification plant and storage tanks, in which Dialog has a 25% equity stake, are scheduled for progressive completion starting in 4Q2017 to 2Q2018.

• The overall Pengerang development undergirds Dialog’s longterm growth prospects as the group is currently securing new potential partners for Phase 3 and future phases, which will be part of an additional 890-acre zone comprising further reclaimable land and the adjoining buffer zone. This caters to additional petrochemical, storage and support facilities which will be needed to support Petronas’ nearby RAPID project. Currently, 440 acres, which account for 65% of the reclaimable land area of 680 acres, has been developed.

• 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 - 21 Sept 2017