We are POSITIVE on the long-awaited MOU to kick start Pengerang Phase 3. Pending further details on the storage terminals development, we reckon that the initial RM2.5b development could build up to 2mm³ in capacity. While keeping our estimates, we reiterate OP call on the stock with higher TP of RM3.35 with potential inclusion into FBMKLCI being a re-rating catalyst on top of its long-term steadily growing recurring business model.

Kick starting Pengerang Phase 3. Yesterday, DIALOG entered into a Memorandum of Understanding (MOU) with the State Government of Johor Darul Ta’zim and, the State Secretary, Johor (Incorporated) (SSI) to launch the Pengerang Deepwater Terminals Phase 3. Pengerang CTF Sdn Bhd (PCTF) which is currently wholly owned by DIALOG will be structured with an equity split of 80:20 between DIALOG and Permodalan Darul Ta’zim Sdn Bhd. Separately, DIALOG awarded a Letter of Award to Penta-Ocean (Malaysia) Sdn Bhd (Penta-Ocean) for the engineering, procurement and construction works for the reclamation, soil improvement and shore protection works (LOA). The land reclamation of approximately 300 acres requires 22 months to complete.

RM2.5b initial cost of investment. With the estimated RM2.5b cost of investment, Phase 3 will be developed on the 300 acres comprising of three main components; (i) common tankage facilities (including shared infrastructure) and dedicated deepwater marine facilities to be undertaken by PCTF, (ii) development of more petroleum and petrochemicals storage terminals for medium-to-long-term customers, and (iii) development of industrial land for further downstream oil and gas related activities. We believe the entire 300 acres land could add storage terminals of 5m-6m m³ but the initial construction phase should only build c.2m m³. DIALOG has yet to finalise its JV partner, the respective stake and source of funding for the storage terminals. While it takes another 12-18 months to build the storage terminals, the earnings from these facilities could only start contributing earliest by FY22.

Keeping our estimates. We are positive on the announcements as it marks the launch of the long-awaited Phase 3 development. That said, we are keeping our estimates as the timeline is rather within our expectations and the storage terminals development has yet to be finalised.

Maintain OUTPERFORM with higher TP. Despite no changes in our FY18-19E earnings, we imputed: (i) the discounted terminal value assuming a terminal growth rate of 1% for Phase 3 (+25.0 sen/share) with formalisation of the development as well as (ii) the 650 acres buffer industrial land valued at RM849m assuming RM30/sf (+15.0 sen/share) into our SoP. This lifted our SoP-driven TP to RM3.35 from RM2.95 (implied FY19E PER of 46x and PBV of 5.5x). Despite the stock already gaining 19% YTD, we continue to favour the stock for its longterm business model with increasing recurring income from its tank terminal business. Note that a potential inclusion into the FBMKLCI with current market capitalisation of RM17b could be another re-rating catalyst. 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 - 6 Apr 2018