- 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 – a 40% premium to its 3-year average.

- Johor Corp’s wholly-owned Tanjung Langsat Port (TLP) has initiated arbitration proceedings against Dialog to claim up to RM576mil (2.3x FY14F earnings) for damages, loss of profit and third party losses arising from a fire which occurred on 17 August 2008.

- These claims include RM77mil in loss of profit for TLP and RM466mil (US$141mil) to indemnify third party’s product losses due to the incident. The fire destroyed 2 storage tanks containing 18mil litres of unleaded gasoline and 8mil litres of naphtalene which was leased to Trafigura.

- This happened after the group had completed and handed over a 100,000 cubic metres oil terminal facility at Tanjung Langsat Port, Johor, Malaysia which Dialog was undertaking under an engineering, procurement, construction and commissioning contract worth RM90mil.

- Note that this tank terminal is wholly-owned by TLP and is not part of the 650,000m3 tank terminals currently owned by the Dialog-Trafigura-MISC consortium.

- The total damages sought by TLP translate to 6.4x of the contract value for the terminal. While the group will be contesting the legal suit as well as the quantum of the damages, the actual costs to rectify the design, repair and reconstruct the facility amounted to only RM33mil – 13% of Dialog’s FY14F earnings.

- In our view, this legal case will be a long drawn out issue. Hence, we maintain FY14F-FY16F earnings for now, pending further updates on this development.

- Now that Petronas’ final investment decision for the Refinery and Petrochemical Integrated Development project has been approved, we expect the 2nd phase for Dialog Pengerang Independent Tank Terminal project to be launched over the next few months. This could also involve joint-ventures for RM4bil liquefied natural gas storage facilities with a capacity of up to 720,000m3.

- Separately for the Balai marginal field development, in which Dialog has an effective 32% equity stake, the operator RocOil has received the approval from Petronas to go ahead with Phase 1 of the field development programme of Bentara field within the cluster. This involves the use of an early production vessel named Balai Mutiara, existing wells in Bentara 2 & 3 as well as facilities built in the pre-development phase. Initial daily production rates are estimated at 2,000-3,000 barrels.

- The stock trades at a fair CY15F PE of 28x, which is at a 40% premium above its 3-year average of 20x.

Source: AmeSecurities