INVESTMENT HIGHLIGHTS

• Proposed acquisition of remaining 45% interests in LGT1 and LGT2 from MISC Berhad

• Total purchase consideration including repayment of shareholders loan to MISC is RM193m

• Proposed acquisition will potentially incur additional borrowings of approximately RM315m (0.1x net gearing)

• Positive earnings accretion towards Dialog FY18 and FY19 earnings.

• Maintain NEUTRAL (with upside bias) with revised TP of RM2.16 per share

Details on acquisition. Dialog Group announced a proposed acquistion of the remaining 45% interests in Centralised Terminals Sdn Bhd (CTSB) for RM137m from MISC Bhd. In addition, Dialog will be taking over MISC’s portion of shareholders loan to CTSB amounting to RM56m. CTSB is an investment holding company with 80% equity interest in Langsat Terminal (One) Sdn Bhd (LGT1), Langsat Terminal (Two) Sdn Bhd (LGT2) and 100% in Langsat Terminal (Three) Sdn Bhd. The Langsat terminals provide centralised tankage and tank terminal facilities for the O&G and petrochemical industries.

Background of LGT1 and LGT2. Both LGT1 and LGT2, located in Tanjung Langsat, Johor have a combined storage capacity of 647m3

and are currently fully contracted. Upon completion of the proposed acquisition, CTSB will be a wholly-owned subsidiary of Dialog Group.

Financial impact. Currently, Dialog is in a net cash position with a cash hoard of RM1.43b (as of 30 June 2017). With the proposed acquisition totalling RM193m (assumed funded by bank borrowings) and the consolidation of CTSB’s outstanding loans, Dialog’s financial position will shift from a net cash position to a net debt position with a net gearing ratio of approximately 0.1x. This would imply that Dialog will need to take on an additional RM315m in borrowings.

Impact on earnings. Taking into consideration potential earnings accretion from LGT1 and LGT2 and additional interest payments on borrowings, we are increasing our FY18 and FY19 earnings forecasts by 16.4% and 7.1% respectively.

Dialog’s share price has been volatile on the upside, stoked by positive news flows from Pengerang and solid earnings. The company’s forward PER is currently at 25x, below its two-year historical average. We are maintaining our NEUTRAL (with positive bias) recommendation with a revised TP of RM2.16 per share. Our valuation is based on a sum-of-parts method pegging a PER of 20x to its core businesses ie. EPCC, Plant Maintenance, Specialist and Catalyst. As for the centralized tankage facilities business, our discounted cash flow is based on a discount rate of 8%.

Source: MIDF Research - 26 Sept 2017