- We maintain our BUY call on Dialog Group (Dialog), with an unchanged sum-of-parts-derived fair value of RM3.40/share, which implies a FY14F PE of 25x – at parity to its 3-year average, but below its peak of 40x in 2007.

- We maintain Dialog’s FY14F-FY16F net profits even though the group’s 1QFY14 earnings appeared to be weak, accounting for only 19% of both our FY14F earnings of RM255mil and street’s RM253mil. This stems from our assumption that the group’s 2HFY14 should be much stronger given that earnings recognition from the RM1.9bil Pengerang phase 1 project, expected to be operational in 4QFY14, should gain momentum, together with initial contributions from the Balai marginal field.

- Dialog’s 1QFY14 revenue decreased by 15% QoQ to RM576mil due to lower specialist products & services in Malaysia, Middle East and Australia. This contributed to the group’s 1QFY14 net profit contraction of 9% QoQ to RM48mil.

- On a YoY comparison, Dialog’s 1QFY14 net profit was slightly higher by 2% despite a strong revenue growth of 38%, which was driven by engineering, procurement and construction (EPC) activities at the Pengerang Deepwater Petroleum Terminal, higher Singapore-based engineering & plant maintenance activities and stronger specialist products and services sales.

- The 2ppt YoY pretax margin contraction to 11% stemmed from lower margin recognition of the Pengerang EPC job coupled with lower associate contributions due to start-up costs for its Pengerang Phase 1, Balai risk-sharing contract and Bayan enhanced oil recovery projects.

- The commercial commencement of the first phase of the Pengerang Deepwater Terminal encompassing 1.3mil cu metres of tank terminal capacity remains on track for the revised 1H2014.

- Pending Petronas’ FID for the RAPID project by 1Q2014, we understand that Dialog’s land reclamation for Phase 2 Tank Terminal development is quite extensive, and is expected to be completed by the end of this year.

- Bloomberg recently reported that the Balai field has commenced oil production, the second marginal field to commence operation since the Petrofac-SapuraKencana operated Berantai RSC started gas production in October 2012. Hence, we are positive that earnings contribution can begin from the Balai field commencement, which will provide further re-rating catalysts for the stock.

- The group’s 50:50 joint-venture with Halliburton Energy Services has also commenced operations to redevelop the matured Bayan oilfield off-Sarawak, but management is unable to provide guidance on the scale and timeline of contributions to Dialog at this stage.

- The stock still trades at an attractive FY15F PE of 22x, well below its 2007 peak of 40x.

Source: AmeSecurities