DIALOG has entered into a share purchase agreement to acquire an additional 25% equity interest in Halliburton Bayan Petroleum for USD8.2m. This brings DIALOG’s equity stake to 75%, from 50% currently. Given the minimal financial impact, we are overall neutral on the acquisition. Maintain OUTPERFORM and unchanged TP of RM4.15, with Pengerang Phase 3 acting as the longer-term growth driver.

Additional 25% stake in Halliburton Bayan. DIALOG has entered into a share purchase agreement with Asia Energy Services Sdn Bhd to acquire an additional 25% equity interest in Halliburton Bayan Petroleum Sdn Bhd for a purchase consideration of USD8.22m (or c.RM34.5m). Post-acquisition, this would bring DIALOG’s equity stake of Halliburton Bayan Petroleum to 75%, from 50% equity stake currently. No approvals are required, with the acquisition expected to be completed within 10 business days from the execution of the share purchase agreement.

Company background: Halliburton Bayan Petroleum is the independent technical service contractor for the oilfield services contract with Petronas Carigali Sdn Bhd, to provide services required to enhance the recoverable reserves from the Bayan field, via services such as production enhancement activities, oil development and prospect appraisal. The Bayan field is located offshore Bintulu, Sarawak, with a term of 24 years (up to 2036).

Minimal impact from the acquisition. The increased stake would lead to a consolidation of Halliburton Bayan Petroleum’s financials into DIALOG’s accounts (as opposed to current earnings being recognised into the JV-line of DIALOG’s income statement). That said, the acquisition should have a minimal impact on DIALOG’s balance sheet (net-gearing of 0.2x as at end-FY19, with net-debt of RM790m). Likewise, earnings impact is also minimal, as we estimate the acquired 25% stake would contribute ~RM4m per year of additional earnings to DIALOG (<1% of FY20-21E earnings). This also implies an acquisition valuation of ~8.6x PER – greatly discounted to DIALOG’s current trading valuations of 35.5x forward PER, while also below oil and gas sector’s average 17x PER.

Ultimately, given the minimal financial impact from the acquisition, we are overall neutral, although we acknowledge the fact that it could provide a slight earnings and valuation enhancement.

Maintain OUTPERFORM, with an unchanged SoP-derived TP of RM4.15 – implying 42x forward PER, which is close to +2SD from its 5- year mean valuations. No changes in our FY20-21E numbers. Nonetheless, we continue to like DIALOG for: (i) its solid track record of earnings delivery, (ii) its defensive earnings from its tank terminal businesses, and (iii) Pengerang Phase 3 acting as a main growth catalyst driver over the longer-term.

Risks to our call include: (i) lower utilisations of its tank terminals, (ii) delay in EPCC jobs, which could further delay income contributions from upcoming expansions, and (iii) delay in the development of Pengerang Phase 3.

Source: Kenanga Research - 19 Aug 2019