- We maintain our HOLD call on Dialog Group (Dialog), with an unchanged sum-of-parts fair value of RM3.40/share, which implies a CY14F PE of 28x – at a 40% premium to its 3-year average.

- We maintain Dialog’s FY14F-FY16F net profits as the group’s 1HFY14 earnings of RM114mil came in within expectations, accounting for 45% of our FY14F earnings of RM255mil and 47% of street’s RM241mil.

- We expect a stronger 2HFY14 given that earnings could begin to be recognised from the RM1.9bil Pengerang Deepwater Terminal phase 1 project, which has 1.3mil cu metres of tank terminal capacity, and is expected to be operational in 4QFY14.

- Dialog’s 2QFY14 revenue rose by 21% QoQ to RM694mil due to higher sales of specialist products & services in Malaysia, Middle East and Australia together with improved billings from the engineering, procurement and construction (EPC) works for Pengerang Phase 1. But EBITDA was flat as margins fell by 2ppt due to lower margins from EPCC works and services in Singapore and ANZ.

- The group’s 2QFY14 net profit increase by 39% QoQ to RM66mil was mainly due to a RM16mil exceptional income in contributions from its 30%-owned Kertih and 44%-owned Tanjung Langsat tank terminal joint-ventures (+3.3x QoQ), coupled with a 6ppt decline in effective tax rate to 17%.

- On a YoY comparison, Dialog’s 1HFY14 net profit rose by 21%, in tandem with strong revenue growth of 38%, which was driven by EPC activities at the Pengerang Deepwater Petroleum Terminal, higher Singapore-based engineering & plant maintenance activities and stronger specialist products and services sales.

- Pending Petronas’ final investment decision for the Refinery and Petrochemical Integrated Development 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.

- Separately for the Balai marginal field development, in which Dialog has an effective 32% equity stake, the operator RocOil is awaiting Petronas’ approval by 1Q2014 for Phase 1 of the field development programme of Bentara field within the cluster which involves early production using the existing wells and facilities built in the pre-development phase.

- The group’s 50:50 joint-venture with Halliburton Energy Services is progressing on its production enhancement 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 trades at a fair CY14F PE of 28x, which is at a 40% premium above its 3-year average of 20x.

Source: AmeSecurities