News  Last week, DIALOG announced that it together with PETGAS (MP; TP: RM21.60) and the state government of Johor, is forming a 25:65:10 JV company to develop a regasification terminal (RGT) at the Pengerang Deep Water Terminal.

 This new RGT, with 3.5m metric tonnes per annum (MTPA) capacity, comprises a regasification unit and two (2) units of 200,000 m3 LNG storage. It is estimated to cost the consortium c.RM2.7b (with DIALOG’s portion of the costs being RM675k).

 The construction is expected to commence by 2Q15 with the EPCC being performed by a Samsung C&T Corporation ledconsortium for a contract period of 55 months, commencing Oct 2014. Operations are expected to commence by 4Q17.

Comments  The 2 storage tanks should constitute Phase 2 of the Pengerang LNG terminal project which is the dedicated LNG tank terminals.

We are positive on the signing, as this finally kick starts the LNG portion of the Pengerang project. Moreover, this JV signifies that DIALOG has also diversified its earnings into the utility business that is recurring in nature.

 Despite the 25%-equity stake for DIALOG; which is lower than our initially assumed 46%-stake; the earnings for the regasification portion project makes up for the lower equity stake.

 We adopt PETGAS’ methodology for valuing this RGT (i.e. on a RGT project basis), versus our previous methodology that just accounts for the tank terminal income for 720k cbm to DIALOG. This yields a similar RM0.15/share (due to the revised valuations that include the regasification income vis-àvis our previous valuation that only constitutes tank terminal income)

 Our PETGAS analyst has assumed: (i) debit to equity ratio of 80:20; (ii) a RGT period of 20 years; (iii) WACC of 6.04%.

Outlook  Pengerang Phase 1A has achieved mechanical completion on 31 Mar and received the first oil shipment on 12 Apr. The construction work for phase 1B has been completed and is now being commissioned for start-up. Phase 1C is due for mechanical completion by end-2014.

 Phase 2 of Pengerang should be “good-to-go” given that the Final Investment Decision (FID) for Petronas’ RAPID project has been approved. For now, the finalised tank terminal capacity and equity stake is still pending.

Forecast  We are maintaining our earnings forecasts for now as the RGT earnings fall beyond our outlook horizon. However, as mentioned above, we have opted to adopt our analyst’s PETGAS valuation methodology for the LNG RGT project.

 According to PEMANDU, there is supposedly an independent LNG Terminal for Trading (comprises of 2 tanks (360,000 m3 storage capacity with regasification facilities) to be constructed from 2013-2016; which could bump up the SoP; but for now we opt to be conservative at this juncture.

Rating As the share price has plunged significantly (-10% since Sep- 14), we lift our call on the stock to OUTPERFORM (from MARKET PERFORM).

Valuation  Our CY15 SoP-based valuation stays at RM1.83.

Risks to our Call (i) Delays in its in-house EPCC jobs and projects and new capex intensive projects which will be a drain on cashflows.

Source: Kenanga