Maintain Buy With a Fair Value (FV) of RM3.90

We reiterate our “buy” recommendation on Dialog Group Bhd with a raised sum-of-parts-based FV of RM3.90 per share (from RM3.38/share), which implies a rolled forward financial year 2020 forecast (FY20F) price-earnings ratio (PER) of 37 times — 15% below its five-year average of 46 times. Our revised valuation has rolled forward the unchanged 25 times earnings multiple from FY19F to FY20F for its core technical, specialist, plant maintenance and fabrication services together with the higher value of the buffer land in Pengerang by RM10 per square foot (psf) to RM80 psf.

We raised FY18F to FY20F earnings by 3% to 7% with a 0.5 percentage points increase in margin assumption for the group’s Middle East operations amid growing demand for specialist products/services and rising activities for its 60% stake in Jubail Supply Base Phase 1, Saudi Arabia. Our earnings forecasts are now 9% to 12% above the consensus.

Dialog’s nine-month financial year 2018 (9MFY18) core net profit (CNP) of RM343 million (+38% year-on-year [y-o-y]) came in above expectations, accounting for 77% of our FY18 forecast and 81% of the consensus. As a comparison, 9MFY15 to 9MFY17 accounted for 72% to 77% of their respective full-year core earnings.

For comparison of core earnings, we excluded the second-quarter financial year 2018 (2QFY18) exceptional FV gain of RM66 million from the acquisition of an effective 36% equity stake in the Tanjung Langsat tank terminals in Johor for RM137 million cash from MISC Bhd. The group declared an interim dividend of 1.4 sen (+17% y-o-y), in line with our expectations.

Dialog’s 3QFY18 CNP was flat (+3% quarter-on-quarter [q-o-q]) mainly from specialist products/services from the Middle East and other countries amid steady progress work recognition for Pengerang Deepwater Terminal (PDT) Phase 2. This was partly offset by an 18% q-o-q decline in associate contribution due to a temporary decline in Pengerang Phase 1 utilisation and full quarterly depreciation of its 25% stake in the RM2.7 billion liquefied natural gas regasification plant and storage tanks.

The group’s progress in the RM6.3 billion PDT Phase 2 is on track as the Rapid complex remains on schedule with progressive completion in early 2019. Last month, the group signed a memorandum of understanding with the Johor state government to develop Pengerang Phase 3, which involves the construction of petroleum/petrochemical storage and a third jetty at an indicative initial cost of RM2.5 billion, in which Dialog will have an 80% equity stake and the Johor state 20%.

We expect 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 RM7.8 billion in a reclaimed area which is half the size of Phase 3. This will be part of a 500-acre (202ha) zone comprising further reclaimable land and the adjoining buffer zone. Additionally, Dialog will be expanding its dormant Langsat Terminal 3 into a 300,000 cu m storage facility.

Dialog trades at a FY19F PER of 35 times, below its five-year peak of 46 times. 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 rerating bonanza, together with a healthy net cash balance.

Source: AmInvest Research - 17 May 2018