News  Last Friday, DIALOG announced that its subsidiary had entered into a shareholders agreement with PRPC Utilities and Facilities Sdn Bhd (PRPCUF); Vopak Terminal Pengerang (VOPAK) and the Johor state government to set up a 25:40:25:10 special purpose vehicle, Pengerang Terminals (Two) (“PT-2”) for the development and construction of storage facilities for the Refinery and Petrochemical Integrated Development (“RAPID”) complex. The Pengerang Terminal Phase 2 project involves the construction of c.2.1m cubic metres (m³) of storage capacity and a deepwater jetty with twelve berths at an approximate total project cost of RM6.3b.

 Besides co-ownership of the tank terminal project; another Dialog subsidiary has entered into an Engineering, Procurement, Construction and Commissioning Contract and Alliance Agreement with PT-2 for the development of the Pengerang Terminal Phase 2 Project with a target EPCC cost of approximately RM5.5b.

 There was no mention of a completion date, however we expect it to be close to the completion date of the RAPID project itself by 2019.

Comments  We are positive on the news as Phase 2 of Pengerang has been long awaited; albeit the shareholding being lower-thanexpected (initial thoughts were that it would be the similar 46%-equity like Pengerang Phase 1).

 There will be 2 income streams from this agreement: i) the EPCC works; and ii) the recurring income stream from the storage tanks once the project starts.

 We have assumed that EPCC contract will have more material impact in FY16 ie. revenue of RM1.38b; and we expect Pengerang Phase 2 to contribute 27sen to DIALOG’s SOTP. We have assumed: (i) debt to equity ratio of 60:40; and (ii) a WACC of 6.1%.

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 was just given the “good-to-go” last week.

Forecast  We have reduced our FY15 net profit by 10.5% largely as we have delayed earnings and lowered margins on the Pengerang Phase 1 tank terminal as we opt to be more conservative at this juncture.

 However, we have increased our FY16 net profit by 8.2% as we include the EPCC earnings for Pengerang Phase 2.

 In our SOTP, we reduced our DCF on the Balai and Bayan fields by 36.3% and 31.8% as we lower our cashflows for both projects; again as we become more conservative on prospects for upstream projects given the fall in crude oil prices.

Rating Maintain OUTPERFORM

Valuation  We have reduced our CY15 PER valuation for the core businesses to 15x (from 16x) in lieu of the weak sentiment of the oil and gas sector. We have ascribed a premium of 3x on sector average of 12x; largely as DIALOG typically trades at a premium due to its long-term business model.

 Our changes and inclusion of the Pengerang Phase 2 results in a reduced CY15 SOP-based valuation to RM1.67 (from RM1.73).

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