This article first appeared in The Edge Financial Daily on February 18, 2019
Dialog Group Bhd
(Feb 15, RM3.15)
Maintain buy with fair value (FV) of RM 3.66: We reiterate our “buy” recommendation on Dialog Group with an unchanged sum-of-parts-based (SOP) fair value of RM3.66/share, which implies an FY20F (forecast) price-to-earnings (PE) of 38 times — 17% below its five-year peak of 46 times. Our SOP values the 650-acre (263.05ha) buffer land in Pengerang at RM80 per sq ft (psf.).
We maintain Dialog’s FY19F-FY20F earnings as its 1HFY19 net profit of RM251 million was largely in line with our expectations, accounting for 51% of our FY19F net profit but 54% of consensus.
As 2QFY19 results included lumpy cost contingency write-backs for the construction of the RM6.3 billion Pengerang Deepwater Terminal (PDT) Phase 2, there is a likelihood that we may raise our FY19F earnings forecast if 3QFY19 results remain as strong.
As a comparison, 1HFY16-1QFY18 earnings accounted for 41-48% of their respective years. For comparison of core earnings, we have excluded the 2QFY18 exceptional fair value gain of RM66 million from the acquisition of an effective 36% equity stake in the Tanjung Langsat tank terminals in Johor for RM137 million cash from MISC.
Notwithstanding Dialog’s Malaysian revenue dropping by 14% quarter-on-quarter (q-o-q), its 2QFY19 net profit rose 19% q-o-q to RM137 million mainly due to the reversal of project contingencies for PDT Phase 2, as Phase 2A was completed in November 2018. This also drove contributions from associates/JV to rise 32% q-o-q to RM41 million. With the completion of Phase 2B by June this year, we expect further write-backs of cost contingencies in 2HFY19. Additionally, the group benefited from stronger 2QFY19 overseas contributions, which climbed 37% q-o-q to RM22 million.
Despite Dialog’s extensive overseas operations, the group’s main earnings driver still stems from domestic operations which account for 88% of 1HFY19 pre-tax profit.
The group has already reached progress stage of 30% for land reclamation of Pengerang Phase 3, which involves the construction of petroleum/petrochemical storage and a third jetty at an indicative initial cost of RM2.5 billion, in which Dialog will have an 80% equity stake and the Johor state 20%.
We expect any co-investments in petrochemical operations with multinational players to be associate-level, value-enhancing and internally funded without any equity raising requirements.
This will be part of a 500-acre zone comprising further reclaimable land and the adjoining buffer zone. Additionally, Dialog will be expanding its dormant Langsat Terminal 3 into a 300,000 m3 storage facility.
Dialog trades at a FY20F PE of 32x, below its five-year peak of 46x. We view its higher-than-peer premium as justified given Dialog’s long-term recurring cash flow-generating businesses, which are largely cushioned from volatile crude oil price cycles, and further underpinned by the Pengerang development’s multi-year value rerating bonanza together with healthy net cash balance. — AmInvestment Bank, Feb 15