This article first appeared in Capital, The Edge Malaysia Weekly, on December 14 - 20, 2015.

THE ongoing development of the Pengerang Deepwater Terminal — now in the second phase — should bode well for Dialog Group Bhd as its engineering, construction and fabrication division is benefiting from the construction works.

The engineering, procurement, construction and commissioning (EPCC) work of Pengerang Deepwater Terminal 2 (PDT2) is already a bright spot for Dialog (fundamental: 2.3; valuation: 1.1), as its other activities, including the upstream segment, registered a lower turnover.

In the first quarter ended Sept 30, 2015 (1QFY2016), almost 60% of Dialog’s revenue of RM536.4 million was from EPCC contracts — Pengerang Terminal 2, Malaysia LNG Train 9 and Sabah Ammonia and Urea. Net profit grew 20.4% year on year to RM60.1 million during the quarter, mainly boosted by share of profits from associates and joint ventures, including the operation of Pengerang Terminal 1.

“The RM5.5 billion EPCC contract for the construction of PDT2 will fully occupy Dialog’s fabrication, engineering and construction division, and underpin the group’s earnings over the next three to four years,” says AmResearch’s Alex Goh in a Nov 18 note.

Dialog’s share price has risen 6.77% so far this year. Analysts are split on whether there is still upside, with 50% of 16 research houses polled by Bloomberg saying “buy” while the rest say “hold”. The consensus target price is RM1.73, implying 10.2% upside potential from last Wednesday’s RM1.57 close.

AmResearch is the most bullish, with its RM2.05 target price implying 30.6% upside potential. If it is right, investors also have an option to trade Dialog-WA, which expires on Feb 12, 2017, and has a RM1.19 exercise price and one-to-one conversion ratio.

At 40 sen apiece, Dialog-WA fetched a 1.3% premium to the underlying share last Wednesday. However, if Dialog appreciates 30.6% to RM2.05 apiece, Dialog-WA should theoretically be worth 115% more, at 86 sen, assuming zero premium to the mother share.

While global oil prices are projected to remain low for the time being, AmResearch says Dialog’s “long-term recurring and robust cash flow generating businesses are largely cushioned from volatile crude oil price cycles”. This is why AmResearch reckons Dialog’s shares deserve to trade at a premium to its sectoral peers: “As Dialog is aiming to secure new potential partners for the subsequent phases of PDT, which will involve downstream development of more petroleum, petrochemical and LNG (liquefied natural gas) storage facilities, we expect this strategic project to continue driving further EPCC contracts and additional recurring income streams for the group over the long term despite the current low crude oil environment.”

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