This article first appeared in The Edge Financial Daily, on November 19, 2015.

Dialog Group Bhd
(Nov 18, RM1.63)
Maintain buy with an unchanged fair value of RM2.05: This is based on our sum-of-parts valuation, which implies a rolled forward calendar year 2016 forecast (CY16F) price-earnings ratio (PER) of 33 times.

Dialog’s first quarter ended Sept 30, 2015 (1QFY16) net profit came in within our and street’s expectations with a seasonal 6% quarter-on-quarter (q-o-q) decline to RM60 million. This accounted for 20% of our and street FY16F estimates versus 1QFY15 contributing 18% of FY15 net profit. The group did not declare any interim dividend.

On a year-on-year (y-o-y) comparison, 1QFY16 net profit rose 20% mainly from the progress works of the Pengerang Deepwater Terminal (PDT) Phase 2 and piping for Malaysia LNG Sdn Bhd Train 9 and Petronas Chemicals Group Bhd’s Samur (Sabah Ammonia-Urea) project, coupled with higher US dollar-driven fabrication jobs in New Zealand. This was partly offset by lower specialist products and services sales to the overseas upstream sector.

Demand for storage facilities is expected to remain elevated, given the current excess global crude supply amid a low price environment. The 1.3 million-cubic metre storage capacity of PDT Phase 1 is fully leased out, serving over 300 vessels to date, including supertankers, since commencing operations in April 2014.

The group has also commenced engineering, procurement, construction and commissioning (EPCC) works on the RM6.3 billion PDT Phase 2. Phase 2, a dedicated industrial tank terminal catering to the refinery and petrochemical integrated development (Rapid) complex, is due for completion between 2018 and 2019, while the RM2.7 billion liquefied natural gas (LNG) regasification plant and storage tanks are scheduled for completion by end-2017.

The RM5.5 billion EPCC contract for the construction of PDT Phase 2 will fully occupy Dialog’s fabrication, engineering and construction division, and underpin the group’s earnings over the next three to four years. Additionally, Dialog has also recently secured the first fabrication job at the newly completed Dialog Fabricators Pengerang Facility, adjacent to Petronas’ Rapid project.

As Dialog is aiming to secure new potential partners for the subsequent phases of PDT, which will involve downstream development of more petroleum, petrochemical and LNG storage facilities, we expect this strategic project to continue driving further EPCC contracts and additional recurring income streams for the group over the long term, despite the current low crude oil environment.

Currently, Dialog is trading at CY16F PER of 27 times, above the sector’s average of 17 times. We view the premium as justified given Dialog’s long-term recurring and robust cash flow generating businesses, which are largely cushioned from volatile crude oil price cycles. — AmResearch, Nov 18