- We maintain our BUY call on Dialog Group (Dialog) with a lower sum-of-parts-derived fair value of RM3.40/share (from RM3.55/share earlier), which implies a rolled forward CY14F PE of 28x - a 12% premium to its three-year average, but below its peak of 40x in 2007.

- We have shaved Dialog’s FY14F-FY16F earnings by 7%-19% due to start-up cost assumptions for the Pengerang Phase 1 project, as well as lower associate contributions from the Tanjung Langsat and Kertih tank terminals.

- We visited the Pengerang Independent Deepwater Petroleum Terminal in Johor yesterday with a group of analysts and fund managers. We note that 400 acres of land has been reclaimed as at end-August this year, which is already 80% of the announced target of 500 acres.

- There is a sizeable safety buffer zone, which is leased to the Dialog-Vopak-Johor state special purpose vehicle, allocated between the Pengerang tank terminal and residents around the area. If the buffer zone is no longer needed due to the proximity of RAPID, we understand that the entire Pengerang tank terminal area could reach 700 acres – 40% larger than the earlier proposed 500 acres.

- The entire Pengerang tank terminal for the 500-acre development includes a RM5bil oil storage facility (5 mil m3 capacity) and a RM4bil liquefied natural gas (LNG) regassification and storage facility of 720,000 m3. Hence, an expansion of the site acreage could result in higher gross development value for the project.

- The engineering, procurement, construction and commissioning (EPCC) progress for Phase 1 of the Pengerang Tank Terminal, which started in early October 2011, has reached 73% as at mid-August 2013.

- Currently, 70%-80% of the currently proposed 1.3mil m3 capacity for Phase 1 on a 150-acre reclaimed land has been taken up by customers. But we understand that the storage capacity can be scaled up by 54% to 2mil m3, if Dialog could secure other off-takers for the additional capacity. We have not incorporated any DCF contributions from the potential capacity expansion, pending an official announcement by the company.

- We understand that Petronas is already clearing some of the site for the US$20bil Refinery and Petrochemical Integrated Development, and has called for tenders for the massive plant, which covers 6,000 acres. Hence, we remain confident that Dialog’s Pengerang Phase 2 development will proceed in 2Q2014, which will further drive the stock’s re-rating momentum.

- The stock still trades at an attractive FY14F PE of 24x, below its 2007 peak of 40x.

Source: AmeSecurities