News

Yesterday, DIALOG announced that it is required to invest in SPV 2 (Pengerang Terminal Phase 2) and SPV 3 (Pengerang LNG project) via injection of funds.

Funding structure of the two SPVs will be a mix of equity and borrowings with debt: equity structure of: (i) 70:30, (ii) 50:50 and (iii) 0:100 depending on market conditions.

The financing is attributable to CAPEX on the 2 projects which mainly involved CAPEX for the EPCC for the necessary facilities of Pengerang Terminal Phase 2 and regasification unit and LNG tankage facility for its LNG project.

DIALOG’s potential share of commitment amounts to RM1.9b for Pengerang Terminal Phase 2 and RM750.0m for the LNG project. The potential commitment could be lower in the event of debt financing secured for the SPVs.

Comments

We were not entirely surprised by the announcement as DIALOG has had the intention of proceeding with the 2 projects. We have also factored in the NPV for Pengerang Terminal Phase 2 and LNG project in our SoP valuation.

This is positive to the company as the proposal of funding indicates that the above 2 projects will be likely to proceed.

Under Scenario C, which is 100.0% equity funding structure for both SPVs, DIALOG is required to raise a total RM2.7b to fund their portion of investments in the projects.

We believe DIALOG needs to raise funds for the funding requirement given the huge CAPEX commitment. Assuming 10.0% share placement by the group, c.RM800.0m of proceeds could be raised based on share price of RM1.56/share. This would be equivalent to 30.0% of the total CAPEX commitment. We also do not discount the possibility of rights issuance as an alternative.

Under Scenario C, DIALOG could gear up to from 0.3x previously to 1.5x. Assuming interest cost of 4.5%, the drawdown of loans could result in additional RM85.5m financing cost for the group.

Additional gearing could be lower if Scenario A and B materializes due to presence of debt funding for the SPVs under the 2 scenarios.

Outlook

Pengerang Terminal Phase 1 will soon be running on full steam with Phase 1A and 1B commencing operations and 1C under commissioning phase at present.

Phase 2 is certain to proceed with Shareholder’s Agreement signed with Vopak Terminal Pengerang (VOPAK) for the development and construction of storage facilities for the RAPID complex. It is expected to add another 2.1m cbm of storage capacity targeted to reach completion by 2019. This is also expected to contribute positively to the group’s EPCC division with Dialog’s portion amounting to RM5.5b.

DIALOG also announced that it has entered into a JV (with 25% equity stake) in the upcoming Pengerang Regasification project. Earnings are expected by 2018 (completion by 4Q17).

Overall, we believe that the group is on track to build on its long-term recurring income stream generating asset base with multiple tank terminals put in place to capitalize on the potential growth in Malaysia’s downstream sector in RAPID.

Forecast

• We maintain our forecasts for now.

Rating

• Maintain MARKET PERFORM

Valuation

• SoP valuation maintained at RM1.67.
• Assuming 10.0% dilution in share base post potential share placement, our TP would be reduced to RM1.50.

Risks to Our Call

• (I) Delay in its in-house EPCC jobs and projects; and
• (ii) New capex intensive projects which drain cash flows

Source: Kenanga Research - 20 Mar 2015