This article first appeared in The Edge Financial Daily on July 21, 2017

Dialog Group Bhd
(July 20, RM1.94)
Reaffirm outperform recommendation with an unchanged target price (TP) of RM2.15: We visited Dialog Group Bhd’s Pengerang Deepwater Terminal (PDT) recently, and are encouraged by the positive progress updates. The group’s next milestone ­— SPV3, the RM2.7 billion Liquefied Natural Gas (LNG) regasification facilities in which it has partnered with Petronas Gas Bhd and the Johor State — has completed pre-commissioning tests and will be receiving its first cargo on Aug 26, 2017, ahead of the initial completion date targeted for end-2017. 

SPV3’s contributions will flow through as associate earnings and reflected from fourth quarter 2017 (4Q17) through Dialog’s 25% shareholding. We like the prospects of this project, as the contract is on a take or pay basis, with an expected internal rate of return of 10% for the duration 25 years (+25 years option). 

Bloomberg recently reported on an interesting new development in the oil market — an offshore supermarket in and about the Straits of Malacca. This new strategy now means that traders are less beholden to the uncertainties of futures prices. 

At the request of buyers, they can supply as little as 100,000 barrels of oil from tankers for delivery in Asia within a week. For Dialog, considering its refinery operations are strategically located along the Johor Strait, we anticipate it would see benefits from the greater proliferation of this development spurred by continuous storage and refining demands from clients.

The group is also poised to develop the buffer zone — 600 acres (242.81ha) of total reclaimable land between its current phases and the Johor mainland. We believe SPV4 and also the future phase are in the group’s plans to be revealed in the mid term.

To recap, our view on Dialog’s rerating is premised on LNG regasification facilities (4Q17) and the dedicated industrial terminal to Petronas (1Q19) to commence operations at their respective stages, Petronas’ unwavering commitment to downstream activities, in particular the Pengerang Integrated Petroleum Complex, which dispels any progress uncertainties, and outlook on oil price stabilisation at US$50 (RM214.50) per barrel.

The current PDT Phase 1 and current construction of Phase 2 has led to the securing of new potential partners for Phase 3 — and to include the development of more petroleum and petrochemical storage terminals. PDT will furthermore provide more opportunities for the group to leverage on its core activities of engineering, construction, fabrication and plant maintenance services. — PublicInvest Research, July 20