Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with unchanged forecasts and sum-of-parts-based (SOP) fair value of RM3.38/share, which implies an FY19F PE of 38x – 157% below its 5-year average of 46x. Our SOP has already incorporated the DCF accretion from Pengerang Phase 3, assuming a similar investment structure as Phase 2.

• We remain convicted of Dialog’s embedded value largely anchored by its Pengerang development, following the memorandum of understanding (MoU) with the Johor state to develop common tankage facilities, shared infrastructure and dedicated deepwater Jetty 3 in Deepwater Terminals Phase 3, which involve the construction of petroleum/petrochemical storage and handling tank terminal business.

• The storage terminals on Phase 3 will be dedicated to multiple users comprising oil traders, multinational oil companies, refinery and petrochemicals plants to facilitate oil trading activities as well as to support various downstream operations including those of refinery and petrochemical plants within the Pengerang Integrated Petroleum Complex and in the Asia Pacific region.

• As such, Dialog has awarded the engineering, procurement and construction works for the reclamation, soil improvement and shore protection works to Penta-Ocean (Malaysia) Sdn Bhd covering 300 acres, which will be completed in 22 months.

• Dialog will have an 80% equity stake in Pengerang Deepwater 3 while the Johor state takes up 20%. While the indicative initial cost of investment in Pengerang Deepwater Terminals Phase 3 is RM2.5bil, we understand that the group will invite joint-venture partners to invest in the storage tanks.

• Unlike in Phase 1-2, Dialog will have an 80% equity stake in Deepwater 3’s common facilities, including the jetty, which could amount to 30%-40% of the initial investment cost. We expect the subsequent investments by other joint-venture partners to reduce Dialog’s stake while boosting Phase 3’s total investment value given that Phase 2 has already reached RM7.8bil in a reclaimed area which is half the size of Phase 3.

• To date, Dialog has reclaimed 440 acres of land, of which Phase 1 occupies 150 acres while Phase 2 will be located on 157 acres. As such, the group has already reclaimed 44% of the earmarked 300 acres for Phase 3. There is an additional 73 acres, which will expand the total reclaimed area to 680 acres, excluding the adjoining 650 acres of buffer land and industrial estate.

• 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.

• 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 - 6 Apr 2018