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 38 – 15% below its 5-year peak of 46x. Our SOP values the 650-acre buffer land in Pengerang at RM80 psf.

• We have fine-tuned Dialog’s FY19F-FY20F earnings as its FY18 core net profit of RM445mil (+20% YoY) came in within our and street’s expectations.

• For comparison of core earnings, we have excluded the 2QFY18 exceptional fair value gain of RM66mil from the acquisition of an effective 36% equity stake in the Tanjung Langsat tank terminals in Johor for RM137mil cash from MISC.

• Dialog also declared a final 4QFY18 dividend of 1.8 sen (+29% QoQ), which translates to an FY18 payout of 35% and DPS of 3.2 sen — 0.3 sen above our estimate.

• We have introduced FY21F net profit with a robust growth of 12%, underpinned by the full recognition of as group’s Pengerang Deepwater Terminal Phase 2 which remains on schedule with progressive completion starting in early 2019.

• Dialog’s 4QFY18 core net profit dipped by 3% QoQ to RM115mil mainly due to a slightly higher minority charge, while its earnings were underpinned by steady progress work recognition for Pengerang Deepwater Terminal (PDT) Phase 2.

• Notwithstanding Dialog’s extensive overseas operations, the group’s main earnings driver still stems from domestic operations which account for 82% of 4QFY18 and 88% of FY18 pre-tax profit.

• The group’s progress on the RM6.3bil PDT Phase 2 is on track as the RAPID complex remains on schedule with progressive completion beginning from early 2019. In April 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%.

• 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. This will be part of a 500-acre zone comprising further reclaimable land and the adjoining buffer zone. Additionally, Dialog will be expanding its dormant Langsat Terminal 3 into a 300,000 m3 storage facility.

• Dialog trades at a FY20F PE of 33x, 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 together with a healthy net cash balance.

Source: AmInvest Research - 17 Aug 2018