- We reiterate our BUY recommendation on Dialog Group with a higher fair value of RM2.05/share (from RM1.95/share previously), based on our sum-of-parts valuation, which implies a CY15F PE of 36x.

- We raise Dialog’s FY15F-FY17F net profit by 5%-16%, as the group’s 9MFY15 earnings are above expectations, accounting for 89% of our estimate and 86% of consensus. The group declared an interim dividend of 1 sen/share (3QFY14: 1.1 sen).

- 3QFY15 net profit grew by 65% YoY mainly from its Malaysian operations due to:- (i) contributions from the Production Sharing Contract (PSC) for the D35, D21, and J4 fields located offshore Sarawak since Sept 2014; (ii) contributions from Pengerang Phase 1 that was fully completed with the commencement of Phase 1C during the quarter and; (iii) higher fabrication activities.

- This was partially offset by the group’s international businesses that saw net profit decline by 14% YoY. This was mainly due to low engineering, construction and plant maintenance activities in Singapore; less fabrication jobs in Australia and New Zealand; and lower sales of specialist products and services in India and Brunei.

- The Phase 2 of Pengerang, a dedicated industrial tank terminal catered for the RAPID complex, is due for completion by mid-2018, while the LNG regasification plant and storage tanks will be completed by end-2017.

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

- Furthermore, the demand for storage facilities is expected to remain elevated as the current low oil prices present 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 a CY15 PE of 28x, 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, with a five-year earnings CAGR of 20%.

Source: AmeSecurities Research - 13 May 2015