Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with an unchanged sum-of-parts-based (SOP) fair value of RM2.75/share, which implies a CY18F PE of 37x – 20% below its 5-year average of 46x. Our valuation includes a 300,000 m3 expansion of storage facilities in Tanjung Langsat and valuation of the 650-acre buffer land value in Pengerang at RM70 psf.

• We have fine-tuned Dialog’s FY18F-FY19F earnings as 1QFY18 core net profit of RM95mil came in largely within expectations, accounting for 24% of our and consensus’ FY18F earnings vs 18%-24% for the past five first quarters of FY13-FY17. The group did not declare any interim dividend, as expected.

• For comparison of core earnings, we have excluded the exceptional fair value gain of RM66mil arising from the acquisition of an effective 36% equity stake in the group’s Tanjung Langsat tank terminals in Johor for RM137mil cash from MISC.

• Dialog’s 1QFY18 core net profit rose 50% YoY from higher progress work recognition for Pengerang Deepwater Terminal (PDT) Phase 2 and increased associate contributions from Pengerang Phase 1, partly offset by lower engineering and plant maintenance services in Singapore.

• However, on a QoQ comparison, Dialog’s 1QFY18 core net profit slid 8% due to lower progress work from PDT Phase 2 and reduced contributions from the group’s Singapore operations, ANZ and the Middle East.

• The group’s progress on the RM6.3bil 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, have been completed on 1 November this year and will fully contribute from 2HFY18 onwards.

• Also, Dialog will be leasing 35 acres of leasehold land from Johor Corp and acquire 100,000 m3 of additional storage tanks next to its Langsat Terminal 1 and 2. The group has affirmed its intention to expand its currently dormant Langsat Terminal 3 into a 300,000 m3 storage facility.

• Meanwhile, the Pengerang development undergirds Dialog’s long-term growth prospects as the group is currently securing new potential partners for Phase 3 and future phases, which will be part of an additional 800-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, Dialog is trading at a CY18F PE of 30x, below its 5-year peak of 46x. We view the premium as justified given Dialog’s longterm 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 rerating bonanza.

Source: AmInvest Research - 22 Nov 2017