We maintain BUY and cut our SOP TP to MYR1.65 (+31% upside) as we adjust  our  oil  price  assumption  and  lower  the  target  P/E  for  its  core business  to  19x  (from  22x).  While Dialog’s  small  E&P  contribution  (at only  10%  of  our  SOP)  demonstrates  its  defensive  value  in  current environment,  we  trim  our  profit  forecasts  given  its  exposure  to international contracts. Our stress test scenario TP is at MYR1.40.   

Brief  summary  of  Dialog.  Dialog  is  an  integrated  multi-discipline technical  service  provider  with  three  distinct  segments:  i)  services  for downstream customers, ii) midstream storage tank terminal, iii) upstream E&P activities. It is also an exclusive agent for specialist products.   

What  happened  in  2009-2010.  Post  the  oil  price  slump  in  end-2008 (Dialog’s  FYE  is  in  June),  its  FY09/FY10/FY11  revenue  grew 40%/3%/6% respectively. Local plant maintenance activities surged and its  Tanjung  Langsat,  Johor  tank  terminals  commenced  operations.  The reduction  in FY10 revenue growth was mainly due to lower activities in its  contracts  for  international  customers.  Today,  in  1QFY15,  Dialog’s revenue has 49% exposure to non-Malaysian customers. Higher sales of specialist  products  and  logistics  services  in  Jubail  port,  Saudi  Arabia were offset by lower activities in Singapore and New Zealand.

Forecast changes. We cut our FY15F-FY17F core profit forecasts by 4-10%,  which  are  now  2-7%  more  conservative  vs  consensus.  Our revenue  growth  also  falls  by  2-9%. We  expect  revenue  accretion  from further operational phases of its tank storage terminals, and contributions from  exploration  and  production  (E&P)  activities  –  all  these  will  also partially  benefit  its  engineering  services  locally.  Excluding  these  would result in our revenue growth assumption of 6% per annum, which mainly reflects  our  conservatism  on  international  contracts  for  its  plant maintenance, fabrication and engineering services.

Maintain  BUY,  SOP  TP  falls  to  MYR1.65  (from  MYR2.00)  based  on our  new  oil  price  assumptions  of  USD75-85/bbl  for  2015  and  USD90-100/bbl for 2016/2017 (vs USD90-100/bbl for all years). We also cut our target  P/E  to  19x  (from  22x)  for  core  services  to  account  for  the aforementioned  risks  in  international  activities.  Note  that  consultant valuations for E&P already assumed USD85-95/bbl. While the stock may be  increasingly  driven  by  offshore  developments,  the  current  levels  do not  reflect  its  defensive  nature  from  its  locational  advantage  and concession-nature of its tank terminal/ logistic business. The risk would be worse-than-expected costs, given the company’s expansion. 

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Dialog Group is mainly involved in downstream segment of the oil & gas industry. It mainly owns and manages tank storage term inals.

Recommendation Chart

Source: RHB