This article first appeared in The Edge Financial Daily on November 13, 2019

Dialog Group Bhd
(Nov 12, RM3.47)
Maintain buy with an unchanged target price (TP) of RM4.90: Dialog Group Bhd’s first quarter of financial year 2020 (1QFY20) core net profit (CNP) accounted for 23% and 24% of our and consensus financial year estimates.

We still like Dialog for its secular growth story, from the scalability of its terminal operations. It is well run with strong financials to boot. Our sum-of-parts-based TP has much upside, and in our view it reflects just a share of Pengerang’s realisable potential.

Dialog’s headline 1QFY20 net profit of RM165 million or 44% year-on-year (y-o-y) includes a +RM27 million one-off item, largely from a RM28.5 million non-cash fair value gain arising from an additional 25% stake buy in Halliburton Bayan Petroleum, raising its stake to 75%. Excluding that, Dialog’s CNP was RM138 million (+21% y-o-y).

The y-o-y strength was driven mainly by higher associate profits of 87% to RM58 million, from its 25%-owned Pengerang Phase 2 crude, product and petrochemical storage terminal (PT2SB) operations and the Pengerang Terminal Two (SPV2).

For its Malaysian operations, despite a 16% y-o-y fall in revenue, its pre-tax profit (ex-EI) grew 1% y-o-y for 1QFY20. Its workflows were generally maintenance-related projects versus engineering, procurement, construction and commissioning, garnering higher margins of 3.9 percentage points y-o-y. Financially, its net gearing remained relatively low, at 11.8% as at September 2019.

Our earnings estimates — a three-year net profit compound annual growth rate of 11% for FY19 to FY22 — are unchanged. The PT2SB will be fully commissioned from the second quarter of 2020, after which Dialog is looking at developing Phase 3 projects.

Phase 3, on 300 acres (121.41ha) of reclaimed land equivalent to Phases 1 and 2, is 88% completed. Meanwhile, the SPV5 in its initial stage will kick off with BP’s 430,000 cubic metres dedicated terminal, or 10% of Phase 3 land usage, starting end-FY21. Maximising Phase 3’s capacity offers a long-term operating visibility.

We see a potential in further value creation beyond Phase 3. Dialog still has up to 600 acres of onshore land for new developments.

With its proximity to the refinery and petrochemical integrated development in Johor and Singapore, and being near a parcel earmarked for new investments, we believe its strategic location next to international shipping routes is a clear advantage or winner.

We view the asset is worth RM1.8 billion or 32 sen at RM70 per sq ft, with strong monetisation prospects. — Maybank IB Research, Nov 12