We are positive on the acquisition of a 45% stake in CTSB as it allows DIALOG to generate higher stable recurring income from the existing two terminals as well as potentially accelerating the expansion of Langsat Terminal 3. We increase FY18E-19E earnings by 2% with the consolidation of these terminals and maintain our OUTPERFORM call on the stock with higher TP of RM2.42/share from RM2.30/share with key catalyst being the formalisation of Phase 3.

Acquisition of 45% stake in CTSB from MISC. Yesterday, DIALOG announced that on 25 September 2017, the company has entered into a Share Purchase Agreement with MISC Berhad (“MISC”, MP; TP: RM8.05) to acquire the remaining 45% interest in the jointly controlled Centralised Terminals Sdn Bhd (CTSB) for purchase consideration of RM137m for: (i) 4.5m ordinary shares of CTSB from MISC which represents 45% of the issued and paid up ordinary shares of CTSB, and (ii) 10,800 redeemable preference share (RPS) of CTSB from MISC, which represents 45% of the issued and paid-up RPS of CTSB. Besides, DIALOG will repay MISC and take over its portion of shareholders’ loan to CTSB, including principal and accrued interest, amounting to RM56m.

Effective stake increased to 80%. Following the acquisition, DIALOG’s effective stake in Langsat Terminal 1 (LT1) & Langsat Terminal 2 (LT2) will be increased to 80% from 44% given that CTSB owns an 80%-stake in these two terminals with the remaining 20% owned by Trafigura, one of the largest oil independent traders. Recall that both terminals have cumulative 647k m³ storage capacity with 30 years concession, expiring in 2037.

We are positive on the acquisition as it allows DIALOG to generate higher stable recurring income from the existing two terminals as well as to potentially accelerate expansion of Langsat Terminal 3 (no details have been firmed up at this juncture). Given the average earnings (net 45% stake) to MISC is c.RM10m/annum, the RM137m purchase consideration translates to a PER of 13.7x and also c.8x EV/EBITDA, which are in line with global tank terminal transactions. The transaction is expected to be completed by 4QCY17 and fully financed through internal funds.

FY18-19E CNP marginally up by 2% to RM396.6m and RM409.9m, respectively, following the increase of effective stake in the terminals to 80% from 44%.

Maintain OUTPERFORM with higher TP. Following the inclusion of additional stakes in Langsat terminals, we maintain our OUTPERFORM call on the stock with higher SoP-driven TP of RM2.42/share (implying 33.0x FY19E PER and 4.0x P/BV) from RM2.30/share previously. We believe the formalisation of Phase 3 will be the major re-rating catalyst to the counter in the long run. Downside risk to our call is a delay in its in-house EPCC jobs, which will further delay its future recurring income from Pengerang Terminal Phase 1 expansion and Phase 3.

Source: Kenanga Research - 26 Sept 2017