- We reiterate our BUY recommendation on Dialog Group with an unchanged fair value of RM1.95/share, based on our sum-of-parts valuations, which implies an FY16F PE of 34x.

- We maintain Dialog’s FY15F-FY17F net profits, as the group’s 1HFY15 earnings are in line with expectations – accounting for 55% of our estimates and 54% of consensus.

- Dialog’s 2QFY15 revenue shrunk by 18% YoY due to the completion of Pengerang Phase 1A and 1B in the previous year, as well as lower revenue from its international segments due to lower engineering & construction, and fabrication activities.

- However, the group’s 2QFY15 net profit grew by an impressive 20% due to the recognition of profits for the EPCC works for its Pengerang Phase 1 which is coming to a tail-end and slightly higher margins for its upstream segment. The group also recorded a one-off disposal gain for assets related to its upstream segment, but this was offset by a write off of non-recoverable interest cost related to its RSC business.

- The Pengerang Phase 1 is near full completion with the final Phase 1C due for commencement in the current quarter. The Phase 2 of Pengerang, a dedicated industrial tank terminal catered for the RAPID complex, is due by mid-2018, while the LNG regasification plant and storage tanks will simultaneously be completed by end-2017.

- Dialog’s Kertih and Tg. Langsat tankage facilities will continue to underpin its stable and recurring income. Management guides that the operations in Tanjung Langsat are beginning to contribute more significantly, after having gone through a gestation period over the last four to five years.

- The demand for storage facilities are expected to increase as the plunge in oil price presents a good opportunity for traders to lock in at the current level.

- The RM5.5bil EPCC contract for the construction of Pengerang Phase 2 will further support the group’s earnings over the next three years.

- Currently, Dialog is trading at an FY16F PE of 29x. This is above the sector’s average of 18x. We believe the premium is justified given Dialog’s recurring and strong cashflow generating businesses, which are relatively insulated from the near-term fluctuations of crude oil prices. We expect the market to continue to support such valuations due to its strong operating track record, having exhibited a five-year earnings CAGR of 20%.

Source: AmeSecurities