Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with a higher sum-of-parts-based (SOP) fair value of RM2.75/share (from an earlier RM2.70/share), which implies a CY18F PE of 37x – 20% below its 5-year average of 46x.

• Our higher SOP stems from the inclusion of an assumed 300,000 m3 expansion of storage facilities in Tanjung Langsat, increasing the 650-acre buffer land value in Pengerang by RM20 psf to RM70 psf and raising CY18F P/E multiples for the group’s specialist/technical/maintenance services to 18x from 15x earlier. However, given Dialog’s large earnings base, our FY18F FY20F earnings are only slightly revised from the additional 100,000 m3 storage from the proposed acquisition.

• Dialog has entered into an agreement with Johor Corp to lease 2 land parcels, measuring 35 acres for 30 years, for RM62mil. They are located next to the group’s 80%-owned Tanjung Langsat Terminals 1 and 2. The price works out to RM43 psf for the 30-year lease, which is comparable to industrial land leases in Tanjung Langsat.

• The company also proposes to acquire a 100,000 m3 tank terminal facility for petroleum and petrochemical products, situated on one of the parcel for RM91mil at RM0.9mil per 1,000 m3 capacity. This is fair compared to the cost of RM1mil per 1,000 m3 to build a new storage facility.

• Recall that Dialog has recently acquired 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) on a 50-acre land while Trafigura owns the remaining 20% (See Exhibit 2). CTSB also owns a 100% equity interest in the currently dormant LGT 3.

• Both terminals are part of the storage and trading hub for oil and gas in Johor and are also within the 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.

• All-in, we remain positive on this value-accretive acquisition which expands the group’s longer term recurring earnings base, which is largely cushioned from volatile crude oil price cycles.

• 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 and further underpinned by the Pengerang development’s multi-year value expansion.

Source: AmInvest Research - 13 Nov 2017