Dialog announced that it has entered into an agreement with Johor Corp to lease 2 parcels of lands in Tanjung Langsat for 30 years and purchase a tank terminal facility on one of the land. Ahead of the upcoming 1Q results tentatively to be released on 21 Nov, we upgrade our FY18-20E earnings by 6%–8%. We maintain our HOLD call and raise our TP to RM2.30.

To Lease 35 Acres Land for 30 Years; Also Buy Over Tank Terminal

Dialog will lease 2 parcels of land from Johor Corp for a period of 30 years for a total payment of RM62m. This 2 parcels of land are split into Plot A and B, measuring at 18 acres and 17 acres, which are located next to the current existing Langsat 1 and 2 terminal facilities. The combined land area of 35 acres can support up to 300,000cbm³ (of which 100,000cbm³ are already up and running). Dialog will also purchase the existing 100,000cbm³ tank terminal located on Plot A for RM91m. This will bring the group’s existing Tanjung Langsat capacities of 647,000cbm³ to 747,000cbm³. Inclusive of the 200,000cbm³ available for development, Dialog is effectively increasing its Tanjung Langsat capacity by 46%. Both corporate exercises are expected to be completed within 3 months from agreement (ie: before end Feb-18). Hence the additional tank terminal capacity acquired is expected to contribute up to 5 months of earnings in FY18E.

Details on Land Expiry and Expansion Cost

Both Langsat 1–3 have similar 30-years land lease expiry, with Langsat 1 and 2 lease expiring in 2037. Meanwhile, the soon-to-be-acquired Langsat 3 land lease is expected to expire in 2048. The development cost for both Langsat 1 and 2 cost around RM600m, while current available Langsat 3 cost around RM100m. This translate to an average of RM1m/cbm³. We have factored in a capex of around RM300m for the total 200,000cbm³ expansion plan.

Better Earnings Visibility

Assuming a 8% net profit margin, we expect Dialog to generate a net profit of RM12m over the next 2 years from EPCC construction work alone. Together with the additional earnings from 100,000cbm³ capacity (4 months contributions) and some house-keeping adjustments made on the tank terminal depreciations, we raised our FY18E forecast by 8%. We also raised FY19-20E earnings by +8% and +6%. All in, we maintain our HOLD call and raise our SOTP-based TP to RM2.30 (from RM2.15).

Source: Affin Hwang Research - 13 Nov 2017