- We reiterate our BUY recommendation on Dialog Group with an unchanged fair value of RM2.05/share, based on our sum-of-parts valuation, which implies a rolled forward CY16F PE of 33x.

- Dialog’s 1QFY16 net profit came in within our and street’s expectations with a seasonal 6% QoQ decline to RM60mil. This accounted for 20% of our and street FY16F estimates vs 1QFY15 contributing 18% of FY15 net profit. The group did not declare any interim dividend, as expected.

- On a YoY comparison, 1QFY16 net profit rose 20% mainly from the progress works for the Pengerang Deepwater Terminal (PDT) Phase 2 and piping for MLNG Train 9 and Petronas Chemicals Group’s SAMUR project in Sabah, coupled with higher US$-driven fabrication jobs in New Zealand. This was partly offset by lower specialist products and services sales to the overseas upstream sector.

- Demand for storage facilities is expected to remain elevated given the current excess global crude supply amidst a low price environment. The 1.3mil m3 of storage capacity of PDT Phase 1 is fully leased out, serving over 300 vessels to date, including supertankers, since initially commencing operations in April 2014.

- The group has also commenced EPCC works on the RM6.3bil PDT Phase 2. Phase 2, a dedicated industrial tank terminal catering to the RAPID complex, is due for completion progressively in 2018-2019, while the RM2.7bil LNG regasification plant and storage tanks are scheduled for completion by end-2017.

- The RM5.5bil EPCC contract for the construction of PDT Phase 2 will fully occupy Dialog’s fabrication, engineering and construction division, and underpin the group’s earnings over the next 3-4 years. Additionally, Dialog has also recently secured the first fabrication job at the newly completed Dialog Fabricators Pengerang Facility, adjacent to Petronas’ RAPID project.

- As Dialog is aiming to secure new potential partners for the subsequent phases of PDT, which will involve downstream development of more petroleum, petrochemical and LNG storage facilities, we expect this strategic project to continue driving further EPCC contracts and additional recurring income streams for the group over the long term despite the current low crude oil environment.

- Currently, Dialog is trading at a CY16F PE of 27x, above the sector’s average of 17x. We view the premium as justified given Dialog’s long-term recurring and robust cashflow generating businesses, which are largely cushioned from volatile crude oil price cycles.

Source: AmeSecurities Research - 18 Nov 2015