Going ahead with Phase 1 expansion. On 18 Aug, DIALOG’s partner, Vopak formally announced the expansion of Phase 1 Pengerang to add 0.43m m³ capacity (vs. max capacity of 1m m³) mainly on clean petroleum products with expected commissioning by 1QCY19. Recall that Phase 1 independent terminal with a storage capacity of 1.3m m³ has been fully leased out to international oil majors and traders. This will add 33% to Phase 1 capacity to 1.7m m³ with undeveloped capacity of 0.57m m³. Pending final formalities, we reckon the rates to be comparative to existing rates averaging at SGD6-7/m³.

Phase 3 coming up soon? With the successful delivery of Phase 1 and good progress for Phase 2 (on track for commissioning by 2019), DIALOG is already in the midst of securing new potential partners for Phase 3 to build more petroleum and petrochemical storage terminals and we do expect some news such as starting reclamation works and/or tie-ups with partners within the next 12 months. Remaining unclaimed land of 200-300 acres land could add storage terminals of up to 5m m³ gradually within the next 5 to 10 years over different phases. Expect a mix of dedicated and independent storage terminals (vs. Phase 1: fully independent; Phase 2: dedicated to Petronas). Our rough estimates show that the unclaimed land of potential 5m m³ capacity would add RM0.20-0.48/share to our SoP valuation assuming a (i) 20%-49% stake, (ii) rental rates of SGD6/m³, and (iii) discount rate of 6.2%. EPCC works could be worth RM6b over next 5-10 years based on RM1k/m³ charge. We also do not discount the possibility that DIALOG would want to build and own 100% of a portion of the additional capacity if the financials are comfortable in the future.

FY18/19E CNP to grow 12%/3%, anchored by robust EPCC works for Phase 2, upcoming EPCC works for Phase 1 expansion, rising associates (RGT from 2HFY18) and growing maintenance earnings (which currently stand at 5-10% currently). Subsequently, we believe DIALOG is able to capitalise the demand of maintenance work for these storage facilities, refineries and its associated assets given existing maintenance relationship with PCHEM. Our FY18/19E earnings is fairly in line with consensus at +2%/-5% deviation, but still lower than management’s target of 10%-20% annual growth.

Upgrade to OUTPERFORM with higher TP. In view of stronger prospect ahead, we upgrade the stock to OUTPERFORM from MARKET PERFORM with higher SoP-driven TP of RM2.30/share (implying 32.4x FY19E PER which is at +0.5S.D. to its 5 year mean and 3.6x P/BV) from RM2.05/share previously imputing: (i) Phase 1 expansion of entire 1m m³ capacity (RM0.12/share), and (ii) indicative valuation of Phase 3 expansion assuming first 2m m³ to be developed by 2020 (RM0.17/share). We believe the development would only start at least in two years as reclamation work has yet to take place if the entire project were to kick start. Given that its share price has surged 30% YTD suggesting market could have priced in some of these positives, we believe formalisation of Phase 3 will be the major re-rating catalyst in the long run. Downside risk to our call is a delay in its in- house EPCC jobs, which will further delay future recurring income from Pengerang Terminal Phase 1 expansion and Phase 3.

Source: Kenanga Research - 28 Aug 2017