- We maintain our HOLD call on Dialog Group (Dialog), with an unchanged sum-of-parts (SOP) fair value of RM3.40/share, which implies a FY15F PE of 27x – a 40% premium to its 3-year average. Upon completion of its proposed 1-for-1 bonus issue, expected to be completed in 3Q2014, our fair value will drop to RM1.70/share.

- We have marginally adjusted Dialog’s FY14F-FY16F net profits as the group’s 9MFY14 earnings of RM164mil came in largely in line with expectations, accounting for 67% of our FY14F earnings and 68% of street’s RM242mil. Dialog usually registers its strongest earnings in 4Q, driven by strong demand for the group’s specialist products & services and plant maintenance operations.

- Additionally, it could have begun to recognise earnings from the RM1.9bil Pengerang Deepwater Terminal phase 1A project – with a 432,000 cu metres tank terminal capacity – as it commenced operations on 12 April this year.

- The remaining 852,000 cu metre capacity in Phase 1 will be completed over 2 stages by 2QCY14 and 4QCY14. But the Balai risk sharing contract, in which Dialog has a 32% equity stake, is expected to contribute minimally in 2QCY14 when it commences oil production.

- Dialog’s 3QFY14 revenue slid 8% QoQ to RM638mil due to lower billings from the engineering, procurement and construction (EPC) works for Pengerang Phase 1 and lower sales of specialist products locally and in the region. The group’s 3QFY14 net profit slid 25% QoQ to RM50mil, mostly due to a RM16mil exceptional income in 2QFY13, which was an associate contribution from the group’s tank terminal joint-ventures (JVs).

- On a YoY comparison, Dialog’s 9MFY14 net profit rose by 16%, in tandem with strong revenue growth of 23%. The latter was driven by higher Singapore-based engineering & plant maintenance activities and stronger specialist products and services sales.

- Now that Petronas’ final investment decision for the Refinery and Petrochemical Integrated Development project has been approved, we expect the construction plans for Pengerang Independent Terminals (PIT) phases 2 and 3 to be expedited over the next few months, depending on negotiations with its customers. Our SOP has already incorporated the potential DCF accretion (assuming an average 40% equity stake) from the 3 phases of PIT, which cover 500 acres of reclaimed land.

- But PIT could involve additional JVs for liquefied natural gas (LNG) storage facilities worth RM4bil with capacity of up to 720,000m3. Assuming an effective stake of 30% in the LNG facility, it could raise our SOP by 29 sen to RM3.69/share.

- We maintain our SOP for now as negotiations with other stakeholders are still in progress, while Petronas Gas has still not reached its final investment decision for its regasification plant in Pengerang.

- The stock trades at a fair FY15F PE of 30x - a 50% premium above its 3-year average of 20x. 

Source: AmeSecurities