Stock Name: DIALOG
Company Name: DIALOG GROUP BHD
Research House: AMMB

Dialog Group Bhd
(Dec 2, RM1.58)
Maintain hold at RM1.50 with fair value of RM1.32: Dialog Group Bhd has entered into a conditional agreement to acquire a 90% stake in Fitzroy Engineering Group Ltd from Peter Clayton White-Robinson for NZ$14 million (RM32 million) cash. Fitzroy's current managing director Richard Ellis will own the remaining 10% stake and White-Robinson will remain as chairman of the company. Given Dialog's net cash balance of RM191 million, the group can easily fund the proposed acquisition, expected to be completed by 1Q2011.

New Plymouth-based Fitzroy is one of New Zealand's largest heavy fabrication and multidiscipline engineering companies. It owns a large fabrication yard on 4ha of leased land, with a capacity of 2,000 tonnes and over 9,000 sq m of covered workshops in Waiwhakaiho, New Plymouth, North Island, New Zealand. The fabrication yard is linked to Port Taranaki's deepwater port by a wide-load heavy-haul transport corridor.

New Zealand's reserves are relatively small, with an annual production of 21 million barrels of oil equivalent (3% of Malaysia's 606 million BOE). The government is encouraging more exploration in the Taranaki Basin and other basins for oil and gas potential. The Taranaki Basin currently has 10 producing fields. Auctions are planned for Pegasus and the Great South Basin areas in 2011 and 2012. The rationale for the proposed acquisition is for Dialog to expand its fabrication presence into the New Zealand and Australian markets.

We are positive about the acquisition as Dialog appears to be acquiring Fitzroy at a bargain five times FY11F PER based on an annualised net profit of NZ$2 million for the six-month period ending Sept 30. But PBV is high at three times (compared with the sector's 2.4 times) based on a book value of NZ$5 million ' which is a condition precedent on completion of the acquisition.

There is currently a legal dispute over Fitzroy's offer to acquire the land on which the lease will expire within two years. But assuming the purchase price of the land at NZ$300 per sq m or NZ$12 million, the combined price tag for Fitzroy still translates to a low PER of seven times. Assuming interest rates at 7%, this acquisition could slightly enhance Dialog's FY12F earnings by 2%.

Dialog currently trades at a CY11F PER of 20 times, at a premium to the oil & gas sector's 11 times due to its defensive earnings profile. We maintain our 'hold' rating for now on Dialog with an unchanged fair value of RM1.32 based on our sum-of-parts valuation. ' AmResearch, Dec 2


This article appeared in The Edge Financial Daily, December 3, 2010.