Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with a raised sum-of-parts-based (SOP) fair value of RM3.38/share (from an earlier RM3.20/share), which implies a FY19F PE of 38x – 15% 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 raised Dialog’s FY18F-FY20F earnings on a 1%-point increase in margin assumption for the group’s construction earnings as Pengerang Deepwater Terminal (PDT) Phase 2 moves towards its back-end construction cycle. Our FY18F net profit is further raised with faster recognition for the RM2.7bil LNG regasification plant and storage tanks, in which Dialog has a 25% equity stake. Recall that the plant has been completed on 1 November last year and will fully contribute from 2HFY18 onwards.

• Dialog’s 1HFY18 core net profit of RM211mil came in above expectations, accounting for 52% of our earlier and consensus’ FY18F earnings. As a comparison, 1HFY15-17 earnings accounted for 42%-47% of their full year results.

• 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. The group did not declare any interim dividend, as expected.

• Dialog’s 2QFY18 core net profit rose 21% QoQ from higher progress work recognition for Pengerang Deepwater Terminal (PDT) Phase 2, increased associate contributions from Pengerang Phase 1 and maiden contribution of the LNG Regassification plant.

• On a YoY comparison, Dialog’s 1HFY18 core net profit mostly driven by rising contribution from PDT Phase 2 progress works and commencement of the LNG terminal, partly mitigated by reduced contributions from the group’s plant maintenance services in Singapore and fabrication services in ANZ.

• 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.

• For the Pengerang development, 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. Additionally, Dialog will be expanding its currently dormant Langsat Terminal 3 into a 300,000 m3 storage facility.

• Dialog trades at a CY18F PE of 30x, below its 5-year peak of 46x. We view its higher-than-peer 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 Pengerang development’s multi-year value re-rating bonanza.

Source: AmInvest Research - 15 Feb 2018