Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with a higher sum-of-parts-based (SOP) fair value of RM2.50/share (from an earlier RM2.45/share), which implies a CY18F PE of 34x – 26% below its 5-year average.

• With the completion of the acquisition of an additional effective stake of 36% in the group’s Tanjung Langsat tank terminals in Johor, we have raised our FY18F-FY20 by 4%, as highlighted in our report on 26 September 2017.

• Recall that 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 while assuming its RM56mil shareholder loan, which translated to a highly value-accretive acquisition PE of 7x as the acquisition was internally funded.

• As such, Dialog, via CTSB, now directly 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 owns the remaining 20% (See Exhibit 2). CTSB also owns a 100% equity interest in the currently dormant LGT 3.

• 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 the Middle East and Asia.

• Both terminals are part of the storage and trading hub for oil and gas in Johor and are also within vicinity of one of the largest refining and petrochemicals, trading and storage centres in Asia.

• However, 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.

• Assuming that Dialog proceeds with the expansion via LGT 3, we estimate that an 80% stake in an additional 380,000 m3 could add a further 10 sen or 4% to Dialog's SOP.
• All-in, we remain 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 - 2 Oct 2017