Warrants Update: Dialog-WA offers exposure to Pengerang project

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DIALOG Group Bhd has long been perceived as a more resilient oil and gas stock compared with its peers that are primarily concentrated in the much riskier upstream segment. An integrated specialist technical service provider to the oil, gas and petrochemical industry, it has greater exposure to the construction of the Pengerang tank terminal project, which is set to provide earnings visibility for the firm over the next two to three years.

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Its prospects were boosted further after it secured RM5.5 billion worth of engineering, procurement, construction and commissioning jobs for Phase 2 of the Pengerang Terminal project on Dec 19. On the same day, it entered into an agreement with PRPC Utilities and Facilities Sdn Bhd (PRPC) and Vopak Pengerang BV to build and operate a storage hub, which is set to cost RM6.3 billion.

With a huge chunk of the project going to Dialog (fundamental: 1.7; valuation: 0.7), this bodes well for Dialog-WA, which expires only on Feb 10, 2017. The company-issued warrant carries a strike price of RM1.19 and a one-to-one conversion ratio.

While the price of Dialog-WA had largely declined over the last six months of 2014 — in line with the rout in oil and gas stocks — it has swiftly recovered since the beginning of 2015. At last Tuesday’s closing of 44 sen, it has gained 14%.  

Over the same period, Dialog’s shares have gained an equally impressive 10%, partly due to improved investor sentiment, as well as the company’s solid order book and fundamentals.

It is worth noting that Dialog-WA was trading at a 1.51% discount to its underlying share as at Jan 27. Over the past year, the premium has gone down considerably, indicating that the warrant is closely tracking the performance of Dialog’s stock.

Maybank IB Research has a target price of RM1.90 on Dialog’s shares, which translates into a 15% upside. Assuming zero premium, Dialog-WA would theoretically be worth 71 sen (RM1.90-RM1.19) or a 61% upside if the mother share reaches Maybank IB’s fair value.

Phase 2 of the Pengerang project is a dedicated terminal with an initial capacity of 2.1 million cubic metres and 12 deepwater berths. Dialog will hold a 25% stake in the project and Petronas-owned PRPC, a 40% stake. Vopak and Johor Incorporated will own the remaining 25% and 10% respectively.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on February 2-8, 2015.