Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly, on June 20 - 26, 2016.

LAST Thursday, Dialog Group Bhd’s warrants (Dialog-WA) lost more than 7% of their value as prices slipped to 31.5 sen apiece on thin volumes. With the mother share almost unchanged at RM1.53, the decline gave Dialog-WA a 1.6% discount to the underlying securities.

Dialog-WA has a strike price of RM1.19 and a one-for-one conversion ratio. An effective gearing of 4.9 times also makes it a cheaper way to gain exposure to the resilient oil and gas maintenance service provider.

Maybank Investment Bank Research maintained a “buy” call with a target price of RM1.90 on Dialog following the recent release of the company’s third-quarter financials. That is a 24% upside for the mother share but a 125% upside for the warrant, given that Dialog-WA should be worth 71 sen if the mother share appreciates to RM1.90 apiece, assuming zero premium to the underlying stock. Do note that Dialog did declare an interim dividend of one sen per share, which will erode the value of the warrant.

Recall that Dialog posted a net profit of RM79 million in the third quarter ended March 31, 2016, but this included about RM9 million in foreign exchange gains. Excluding these gains, the company’s net profit fell 11% year on year, mainly due to lower sales of specialist products and services, notes Maybank IB Research in its report.

However, the group’s profit from the tank terminal business remained steady, at RM15 million.

Dialog is the largest and most profitable tank terminal operator in Malaysia with 2.3 million cubic metres of capacity. Capacity is set to expand to 4.47 million cubic metres by 2019. Note, however, that the warrants are due to expire in mid-February next year.

Maybank IB Research is one of seven research houses with a “buy” recommendation while the remaining seven have ‘”hold” with price targets of between RM1.43 and RM2.05, averaging at RM1.75, Bloomberg data shows.

Despite the volatile outlook for other oil and gas-related stocks, Dialog has been one of the few counters that have been resilient. Apart from the steady income from the tank terminal business, Dialog has secured RM5.5 billion worth of work from Petroliam Nasional Bhd’s Refinery and Petrochemical Integrated Development project.

Hence, Dialog’s share price is expected to see limited downside. Looking ahead, another catalyst for Dialog would be a new tank terminal contract, although earnings contribution will not be seen in the near term. 

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