Dialog Group Bhd
(Nov 14, RM1.56)
Maintain “add” with a lower target price (TP) of RM1.85 from RM2.08: We left our recent meeting with Dialog Group’s management feeling positive with the progress of the Pengerang tank terminal development. Phase 1 is almost complete while Phases 2 and 3 are ready for development.

Despite a rollover, our TP falls as we lower our financial year 2015 (FY15) to FY17 earnings per share to impute higher operating costs for both upstream and downstream operations as Dialog lays the foundation for future growth.

We now value the stock at 21.2 times FY16 price-earnings ratio (PER) (formerly 23.4 times FY15 PER) as we scale back the target premium over our 16.3 times target market PER from 40% to 30% to reflect the current weak oil price sentiment.

Pengerang’s attractive prospects are the potential rerating catalysts that support our “add” call.

Contributions from activities at Pengerang’s 170-acre (69ha) Phase 1 tank terminal were behind Dialog’s 12% year-on-year (y-o-y) rise in net profit to a new high in FY14. The contributions are expected to pick up in financial year ending June 2015 (FY15) given the commencement of operations at phases 1A and 1B, and completion of the construction of facilities at Phase 1C.

We learnt from our recent meeting with the management that Phase 1A has received no less than 50 crude oil shipments since the first shipment on April 12, 2014.

Phase 1B (petroleum products) is also in operations while the construction of Phase 1C (crude oil) is near completion.

We are encouraged by the swift development of Phase 1, which is expected to pave the way for Phases 2 and 3.

To accommodate the anticipated increase in construction works, we understand that Dialog has expanded its yard from 35 acres in June 2012 to around 100 acres currently.

The yard is adjacent to the project site. The bigger yard comes in handy as Dialog is also eyeing opportunities at Petroliam Nasional Bhd’s refinery and petrochemical integrated development (Rapid) next door. Rapid received the much-awaited final investment decision in April 2014.

We advise investors to accumulate the stock to take advantage of the share price correction. Dialog is by far the biggest winner of oil and gas investments under the government’s Economic Transformation Programme through its involvement in both downstream (Pengerang tank terminals) and upstream (production-sharing contracts, risk service contracts and enhanced oil recovery) operations. — CIMB Research, Nov 14

This article first appeared in The Edge Financial Daily, on November 17, 2014.