Dialog announced that it is acquiring the entire 100% equity interest in Pan Orient Energy Corp (POEC) for a cash consideration of USD38.7m (or approximately RM170.0m), which in turn owns 50.01% equity interest in Pan Orient Energy (Siam) (POES) – which is the operator and concessionaire of Concession L53/48, onshore Thailand with 2P reserves of about 4.6m barrels as at 31 Dec 2021. Overall, we are slightly negative on this development as we deem the acquisition to be rather pricey. We are also worried about the fact that this acquisition happened at a high oil-price environment. Nonetheless, maintain BUY with an unchanged SOP-derived TP of RM3.32.

NEWSBREAK

Dialog announced that it is acquiring the entire 100% equity interest in Pan Orient Energy Corp (POEC) for a cash consideration of USD38.7m (or approximately RM170.0m), which in turn owns 50.01% equity interest in Pan Orient Energy (Siam) (POES) – which is the operator and concessionaire of Concession L53/48, onshore Thailand.

HLIB’s VIEW

Key highlights. We note a few key salient points, as below. We highlight our assumptions throughout the report: (i) USD:CAD exchange rate of 1.26; and (ii) USD:MYR exchange rate of 4.40.

1) POES produces about 2.7k barrels of oil per day from 7 oil fields in Thailand with plans to further increase production in future. POES’s 2P reserves stands at 4.6m barrels as at 31 Dec 2021 (100% stake).

2) From POEC’s website, we understand the following: (i) net cash level stood at CAD14.1m (100%); and (ii) minority interest level stood at CAD5.56m (100%). Taking into account 50% of equity interest and post-conversion to USD, we derive POEC’s enterprise value (EV) at USD35.3m. Based on the production level of 2.7k bpd, we estimate POES’s 2P reserves to be at 2.18m barrels as at 31 March 2022 (after netting off 2.7k x 90 days) (50% stake). Based on our calculation, we understand that the POEC is valued to be USD16.2 for each dollar of its 2P reserves (EV/2P). We deem this to be rather pricey.

3) As a benchmark, Repsol’s assets were acquired by Hibiscus at an EV/2P valuation of USD6.2.

4) On the other hand, based on: (i) Hibiscus’s current share price of RM2.6bn; (ii) net cash (ex-restricted cash) of RM139.4m; and (iii) Hibiscus’s estimated 2P reserves of 77.3m as at 1 Jan 2022 and 75.9m as at 31 March 2022, we highlight that the market currently values Hibiscus at an EV/2P valuation of USD7.4.

5) After considering all factors, we are slightly negative on this development. We are also worried about the fact that this acquisition happened at a high oil-price environment – which may explain the valuation premium. We also estimate a net profit contribution of RM15-20m annually – which is insignificant relative to the group’s large earnings base of > RM500m annually.

6) We estimate that the acquisition will marginally increase Dialog’s proforma net debt and gearing of -RM477.1m and 0.10x as of 3QFY22 to -RM647.1m and 0.13x.

Forecast. Unchanged.

Maintain BUY – unchanged of RM3.32. Our SOP-derived TP of RM3.32 implies a 48% upside to current share price. Valuation wise, Dialog is currently trading at FY23F P/E of 21x, which is at about 35% discount to its pre-pandemic mean of 32x in 2019. We continue to like Dialog for its recurring income type of business model and we deem it as one of the only listed secular growth stock in the local oil and gas space.

Source: Hong Leong Investment Bank Research - 8 Jun 2022