This article first appeared in The Edge Financial Daily on September 17, 2019

Dialog Group Bhd
(Sept 13, RM3.49)
Maintain buy with a lower target price (TP) of RM4: We still like Dialog Group Bhd for its consistent earnings growth of 7% to 10%, solid return on equity of 14% to 14.3% and its recurring income business model. Dialog is trading at 36.7 times financial year ending 2020 forecast (FY20F) price-earnings, lower than +1.5 standard deviation to its five-year mean.

Near-term rerating catalysts are a continuous earnings delivery and news flow on its Phase 3 capacity expansion. As the Pengerang Integrated Complex is approaching completion, with some plants at the commissioning stage, we expect plant and facilities maintenance works to pick up gradually in two years, supported by the award of a five-year group-wide master service agreement from Petroliam Nasional Bhd (Petronas) for the integrated turnaround main mechanical and maintenance mechanical static, whereby most of the work is related to plants in Pengerang.

Recall Dialog’s 90%-owned Pengerang Terminals (Five) Sdn Bhd (PT5) had entered into a long-term storage agreement with BP Singapore to provide 430,000 cubic metres (cu m) of clean petroleum storage tanks services, with an estimated capital expenditure (capex) of RM1 billion. Thus, we estimate Dialog will still secure more takers-off for its Phase 3A investment plan, with an initial RM2.5 billion investment.

Take note that we have factored in an additional five million cu m of capacity for Phase 3, resulting in a discounted cash flow-derived value of 60 sen per share, assuming an average equity stake of 35%, a 17% internal rate of return, a RM5 billion capex, a 70:30 debt/equity ratio, and a 5.7% weighted average cost of capital.

Subsequent to the Phase 3 expansion, Dialog has another piece of industrial buffer land of about 500 acres (202.34ha) that could translate into an additional eight million to 10 million cu m storage capacity in the long term. Additionally, we are generally positive about the management’s intention to venture into the petrochemical space to further diversify into the oil and gas value chain.

These expansions could be expedited if the Pengerang Integrated Petroleum Complex (PIPC) Phase 2 project could be rolled out in one to two years. Dialog, in our view, appears a good local joint-venture candidate, with its entrenched exposure to Pengerang coupled with its engineering, procurement, construction and commissioning as well as plant maintenance expertise. We had yet to factor in this upside, which could add an additional 14 sen per share to our TP assuming a conservative valuation of RM40 per sq ft.

We lifted our FY20F and FY21F earnings by 6.4% to 14.5% after imputing higher contributions from its fabrication arm, plant maintenance services and its dedicated tank terminal for Petronas. We have introduced our FY22F earnings of RM676 million or +7% year-on-year, assuming a maiden contribution from PT5 and a 10% growth in plant maintenance and catalyst handling services. After an earnings adjustment, our sum-of-parts-derived TP is lowered to RM4 from RM4.23, factoring in a fully diluted share base of 6.2 billion, assuming a full conversion of the employees share option scheme. — RHB Research Institute, Sept 13