News Yesterday, Dialog Group (DIALOG) announced that its whollyowned subsidiary, Dialog E & C Sdn Bhd (DECSB) had received a Notice of Arbitration from Tanjung Langsat Port Sdn Bhd (TLP) in relation to claims that a fire incident which had occurred in Aug-08 was caused by DECSB’s breaches of its obligations under the Engineering; Procurement, Construction and Commissioning. (EPCC) contract.
TLP is alleging that it is entitled to an aggregate of at least c.RM568.5m (includes repair and construction costs; loss of profits and indemnities against TLP’s liability towards TLP’s dedicated user) for damages that it has suffered. In comparison, the EPCC contract was RM89.5m.
The company guides that the matter has been referred to DECSB’s solicitors and DECSB intends to pursue all available legal avenues to challenge the claims.
Comments We are neutral on the news for now, as arbitrations typically take years to be settled. Furthermore, we believe it is premature to make any conclusion at this juncture.
However, we expect there will be a negative knee-jerk reaction in its share prices given the quantum of the claims (2x FY16E net profit and c.6x the original EPCC cost).
We understand that there is no provision to be made, until the turnout of the case can be determined.
Outlook Construction works for Phase 1A Pengerang CTF is ongoing with tentative completion by 1QCY14. Phase 1B and Phase 1C are expected to be completed in mid-2014 and end-2014.
Phase 2 should be ‘good-to-go’ given that the Final Investment Decision (FID) for Petronas’ RAPID project was approved last week. For now, the finalised tank terminal capacity and equity stake is pending. We have already included an additional 0.72m cbm of storage capacity into our sum-of-parts forecasts from FY17 onwards.
The Balai RSC has apparently hit first-oil and is due for Extended Well Testing (EWT) programme by 1QCY14. We have only expected earnings contributions from FY17, and as such, any project acceleration would be further earnings catalyst for DIALOG.
Forecast As mentioned above, we believe it is premature to conclude or incorporate any of the above-mentioned costs; hence, we maintain our FY15-16E assumptions.
Rating Barring this one-off negative event, we continue to view DIALOG as one of the best oil and gas companies given that its upstream aspirations thrive on the success of the Balai and Bayan projects; whilst the downstream segment will ride on the Pengerang oil and gas development. As such we maintain our
OUTPERFORM recommendation.
Valuation Our CY15 SoP-based valuation TP is RM3.92.
Risks to Our Call (i) Delays in its in-house EPCC jobs and projects.
(ii) New capex intensive projects which will be a drain on cashflows.
Source: Kenanga
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