We are positive on the expansion plan with Langsat Terminal 3 as it allows DIALOG to generate higher stable recurring income. While maintaining our earnings estimates pending 1Q18 results announcement early next week, we reiterate our OUTPERFORM call with a higher target price of RM2.55/share after the inclusion of the additional 300k m³ capacity valuation which is worth RM0.13/share.

Expanding with Langsat Terminal 3. Last Friday, DIALOG announced that it has entered into a Lease Agreement and Sale of Facilities Agreement with Johor Corporation (JCorp) on 10 November 2017 to (i) lease two parcels of land (18 acres Plot A land and 17 acres Plot B land at Tanjung Langsat, Johor) from JCorp for 30 years for a total lease rental of c. RM62m, and (ii) purchase a tank terminal facility consisting of equipment, machinery and assets for the handling, storing, separating, blending and distributing petroleum by vessel and petroleum-related products, petrochemical products and such chemical products and other substances of blending components with 100k m³ storage capacity at Plot A land for RM91m.

We are positive on the agreement as they will enable DIALOG to expand its Langsat Terminal’s existing capacity of 647k m³ by an additional 300k m³ or 46%. The expansion consists of the newly purchased 100k m³ tank terminal as well as undeveloped capacity of 200k m³ on the leased land. In our view, the purchase consideration of RM910/m³ is deemed attractive given that construction of the tank terminal would cost RM1000-RM1500/m³. Meanwhile, we understand that the 100k m³ terminal is slated for commissioning in 1QCY18 while the other 200k m³ tank terminal will be developed within the next two years. These are independent tank terminals and DIALOG is in the midst of securing off-takers. Financing-wise, DIALOG is likely to adopt similar project financing structure as Langsat 1 & 2 with a debt-equity ratio of 80:20, which will lift its FY19E net gearing to 0.2x level from net cash level as of 4Q17.

Maintain current earnings estimates pending 1Q18 results announcement early next week. Note that the inclusion of 100k m³ tank terminal facility would generate c.RM5m net profit (1% of our FY19 forecast) assuming 65% utilisation and subsequently up to RM16m (3% of FY19E PATAMI) upon full development of 300k m³ capacity.`

Maintain OUTPERFORM with higher TP. Following the addition of 300k m³ capacity including development of 200k m³ capacity by FY21 in Langsat Terminal 3 into our SoP, we maintain our OUTPERFORM call on the stock with higher TP of RM2.55/share (implying 35.1x FY19E PER and 4.2x P/BV) from RM2.42/share previously. We believe formalisation of Phase 3 will be the major re-rating catalyst to DIALOG in the long run. Downside risk to our call is a delay in its in-house EPCC jobs, which will postpone future recurring income from Pengerang Terminal Phase 1 expansion and Phase 3.

Source: Kenanga Research - 13 Nov 2017