Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with a higher sum-of-parts-based (SOP) fair value of RM3.20/share (from an earlier RM2.75/share), which implies an FY19F PE of 40x – 15% below its 5-year average of 46x.

• Even though Dialog’s share price has continually outperformed the FBM KLCI by 50% last year and achieved our fair values multiple times, we maintain our conviction that the stock’s multi-year re-rating process remains intact.

• While our earnings forecasts are unchanged, we have raised Dialog’s SOP, partly with the inclusion of a 373-acre reclaimable land in Pengerang at RM50 psf. This is the balance of the total reclaimable land of 680 acres following the completion of Pengerang 1 (150 acres) and Pengerang Phase 2 (157 acres) by 2019. Currently, 133 acres of the additional land have already been reclaimed, with a total reclaimed area of 440 acres to date.

• Recall that the Pengerang Deepwater Terminal (PDT) 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 the additional 1,000-acre zone comprising further reclaimable land and the adjoining 650-acre buffer zone.

• At the current stage, Dialog’s footprint in Pengerang has expanded from the original plan of only 500 acres by 2.7x to 1,330 acres, catering to additional petrochemical, storage and support facilities which will be needed to support Petronas’ nearby RAPID project.

• We have also rolled forward our PE multiples from CY18F to FY19F for the group’s specialist/technical/maintenance services, with higher targets at 25x from 18x earlier.

• Currently, 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 2018–19. Additionally, the RM2.7bil LNG regasification plant and storage tanks, in which Dialog has a 25% equity stake, have been completed on 1 November last year and with full contribution from 2HFY18 onwards.

• PDT phase 1 will expand by 33% or 430,000 m3 of storage under phase 1E, which will leave enough space for additional tanks with a capacity of 600,000 m3. 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 Terminals 1 and 2. The group has further affirmed its intention to expand its currently dormant Langsat Terminal 3 into a 200,000 m3 storage facility.

• Currently, Dialog is trading at a FY19F PE of 34x, below its 5- year peak of 46x. We view the premium as justified given Dialog's long-term recurring cash flow-generating businesses, which are largely cushioned from volatile crude oil price cycles, and further underpinned by the strategic Pengerang development's revaluation dynamics.

Source: AmInvest Research - 11 Jan 2018