This article first appeared in The Edge Financial Daily on November 14, 2017

Dialog Group Bhd
(Nov 13, RM2.36)
Reiterate add call with a higher target price of RM3.13: Last Friday, Dialog Group Bhd signed a 30-year land lease agreement with Johor Corp to lease two parcels of land at the Tanjung Langsat port for a one-off payment of RM62 million.

Plot A (18 acres or 7.28ha) currently houses 100,000 cubic metres (cbm) of clean petroleum and petrochemical tanks, which Dialog will buy over from Johor Corp for RM91 million. Plot B (17 acres) is currently empty and Dialog plans to build another 200,000cbm of tank storage capacity over the next two years.

We have assumed a capital expenditure (capex) cost of RM1,100 per cbm, or RM220 million, for Plot B.

After the completion of the acquisition of Plot A and the commissioning of Plot B, the Langsat Tank Terminal Facilities (LTTF) will house 947,000cbm of storage capacity, an expansion of 46%.

Langsat 1 and 2 are currently 80% owned by Dialog after it acquired MISC Bhd’s stake in late October, with Trafigura as the user and customer owning the remaining 20%. Conversely, Dialog will own 100% of Langsat 3 at the onset, although Dialog may yet sell a stake to a future off-taker, which has not yet been identified.

Plot A was built in 2007 by Dialog’s wholly-owned Dialog E & C Sdn Bhd, and then handed over to Tanjung Langsat Port (TLP), which is part of Johor Corp. In 2008, a fire consumed two tanks, causing operations to be suspended until today.

TLP filed a notice of arbitration against Dialog in 2014, alleging defective design/construction work and claimed RM33 million for repairs, RM100 million for losses of profits and an indemnity of at least US$30 million. We are unsure if TLP will withdraw its claim since Dialog is purchasing Plot A.

Plot A has been cleared by safety experts to resume operations, and Dialog is comfortable with the facility and expects to reactivate the 100,000cbm of Plot A within six months. We believe Dialog has most probably already secured an off-taker, although this was not disclosed last Friday, and we are unsure whether this will be a long-term contract. As for Plot B, we have assumed that Dialog will complete 200,000cbm in stages and fully commission the facility by financial year 2020 (FY20).

The capex cost of RM1,100 per cbm for Plot B is not large since the existing jetty facilities at the LTTF are underutilised and can accommodate another 300,000cbm of capacity. Furthermore, Plot B does not require land reclamation work, and both Plots A and B can ride on the common facilities already in place at Langsat 1 and 2.

We have incorporated the valuation of Langsat 3 into our discounted cash flow valuation of the tank terminal business, assuming that: i) Langsat 3 will be operational in stages between FY19 and FY20, with utilisation rising gradually from 50% in FY20 to 95% from FY22; ii) capex will be 70% funded by debt; iii) Langsat 3 will earn rates similar to Langsat 1 and 2; and iv) the 30-year land lease for Langsat 3 will be extended by a further 30 years until FY78. Downside risks include a slower-than-expected pickup in utilisation rates. — CIMB Research, Nov 13