Investment Highlights

• We reiterate our BUY recommendation on Dialog Group with an unchanged sum-of-parts-based (SOP) fair value of RM3.90/share, which implies a rolled forward FY20F PE of 37x – 15% below its 5- year average of 46x. Our valuation includes the 650-acre buffer land in Pengerang being valued at RM80 psf.

• We are positive on Dialog’s acquisition of the remaining 20% stake in the centralised tank terminal facilities in Tanjung Langsat 1 and 2 from Puma Energy Asia Pacific B.V. (PUMA) for RM95mil, including the assumption of RM32mil debt due from PUMA.

• Operational since 2009 and strategically located near the international shipping lanes in the vicinity of Singapore, the two terminals have a total storage capacity of 647,000 cubic metres (m3) and are currently fully utilised on term contracts.

• Both terminals are part of the storage and trading hub for oil and gas in Johor and are in the vicinity of one of the largest refining and petrochemicals, trading and storage centres in Asia.

• Dialog also wholly owns the equity interests in Langsat Terminal (Three) Sdn Bhd (LGT 3), which acquired two parcels of lease lands and a 100,000 m3 tank terminal in Tanjung Langsat, Johor in March 2018 for further capacity expansion.

• As LGT 3 can support the development of another 300,000 m3 of storage capacity, Dialog’s total tank terminal storage capacity in Tanjung Langsat could expand by 40% to 1mil m3.

• Given Dialog’s gross cash of RM1.3bil and a low 0.1x net gearing as at 31 March 2018, we expect the group’s internal funds to easily finance the acquisition.

• We estimate that the acquisition, which translates to a PE of 9x, could add RM9mil or 2% to Dialog’s FY19F earnings. As the increase will be insignificant to the group, our forecasts are unchanged for now.

• Meanwhile, the main valuation re-rating catalyst for the group stems from its Pengerang Deepwater Terminal (PDT) project. 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 early 2019.

• Earlier this year, 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 RM2.5bil, in which Dialog will have an 80% equity stake and the Johor state 20%.

• Dialog trades at an FY19F PE of 36x, 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 rerating bonanza together with a healthy balance sheet.

Source: AmInvest Research - 11 Jun 2018