- We maintain our BUY call on Dialog Group (Dialog), with an unchanged sum-of-parts-derived fair value of RM3.16/share, which implies an FY14F PE of 25x – at parity to its three-year average but below its peak of 40x in 2007.

- We have slightly tweaked Dialog’s FY13F earnings while maintaining FY14F-FY15F net profits even though its 9MFY13 earnings of RM141mil appears to be below expectations, accounting for 68% and 67% of our and street’s FY13F estimates respectively. This is because the group continued to suffer losses from a RM8mil loss in Singapore, due largely to an on-going live plant maintenance job, which was completed last month.

- Our channel checks indicate that Dialog has fully provided for the losses in 3QFY13 for this project, which underwent tough working conditions amid high down time. With the completion of the Singapore project, we understand that the group hopes to claim some variation orders from the client. Hence, we expect Dialog’s 4QFY13 earnings to stage a rebound to possibly meet current expectations.

- YoY, the group’s 9MFY13 revenue rose 37% to RM1.6bil but net profit grew at a slower rate at 11% due to a 2%-point EBITDA contraction to 11%. This stemmed largely from the losses arising from the Singapore job as well as lower construction margin from the Pengerang engineering, procurement and construction contract.

- Additionally, the group’s 9MFY13 associate contributions slid 12% YoY to RM36mil due to start-up costs for its Pengerang Phase 1, Balai risk-sharing contract and Bayan enhanced oil recovery projects. Likewise, Dialog’s 3QFY13 revenue rose 27% QoQ to RM637mil due to recognition of construction activities at the group’s tank terminal project in Pengerang, but pre-tax profit fell 6% to RM53mil.

- Dialog is now undertaking the fabrication of 1.3mil cu metres of tank terminal capacity with first oil commissioning in 2014. While the subsequent Phase 2 is yet to be launched, we understand the land for this phase has already been fully reclaimed and pending the finalisation of capacity take-up by Petronas, which is expected to make the final investment decision by next month for the Refinery and Petrochemical Integrated Development project.

- On a separate note, the group’s pre-development stage is going well for its Balai marginal cluster field project with jointventure partners RocOil and Petronas Carigali. Currently, the first 4 appraisal wells have yielded positive results and the consortium is drilling the fifth well. The group’s 50:50 jointventure with Halliburton Energy Services has also commenced operations to redevelop the matured Bayan oilfield offSarawak, which could significantly contribute to Dialog’s prospective earnings momentum.

- The stock still trades at an attractive FY14F PE of 22x, below its 2007 peak of 40x.

Source: AmeSecurities