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This article first appeared in The Edge Financial Daily on October 13, 2017

Dialog Group Bhd
(Oct 12, RM2.16)
Downgrade to hold with a higher target price (TP) of RM2.33:
We raised financial year ending June 30, 2018 (FY18) to FY20 earnings per share forecasts and TP by 3%, incorporating for the impact of its 45% acquisition of Centralised Terminals Sdn Bhd (CTSB).

While we remain an enthusiast of its business and management, most of the positives have been priced in. The stock is up 45% year to date, outperforming the FBM KLCI by 37%, narrowing the discount to our revised sum-of-parts-based TP to 6%. We posit that Dialog is fairly valued for now until new development at its terminal businesses unfolds.

Dialog now owns 80% of Langsat Terminal One and Two (with Trafigura owning the remaining 20%), following the completion of the acquisition of a 45% stake in CTSB from MISC Bhd for RM137 million.

The deal, transacted at FY16 eight times enterprise value/earnings before interest, taxes, depreciation and amortisation (EV/Ebitda), 13 times price-earnings ratio (PER) and RM588/m3, is positive for Dialog.

Valuations are below MISC-VTTI’s deal in 2010 of 12 times EV/Ebitda, 34 times PER and RM943/m3. This CTSB deal adds RM8 million to RM13 million per annum to its bottom line and 7 sen per share to net present value.

With this, Dialog will now have two avenues for growth — Pengerang and Tj Langsat. With ample land space, both can still facilitate expansion beyond their existing 3.1m3 and 0.7 million m3 capacity.

However, the 20-year concession for its 30%-owned Kertih Centralised Tankage Facility (KCTF) (400k m3 storage capacity) will end in 2020. While we do not rule out an extension, there is a possibility that the rates could be revised lower. KCTF contributes about RM30 million per annum to the group’s earnings.

Unless new storage capacity expansion plans are unveiled, Dialog’s share price reflects its current business operations. Our revised TP offers a mere 6% upside, thus the downgrade in our call to “hold”. — Maybank IB Research, Oct 12

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