Warrants Update:Higher Pengerang income may lift Dialog-WA

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This article first appeared in Capital, The Edge Malaysia Weekly, on February 29 - March 6, 2016.

DESPITE the low crude oil prices, analysts are still bullish over the prospects of Dialog Group Bhd. Its core businesses in engineering, procurement, construction and commissioning (EPCC) and tank terminal operations are seen as insulated from the mayhem that has struck other oil and gas companies.

Dialog’s earnings in the first half of financial year 2016 ended Dec 31, 2015, increased 6.5% to RM138 million from a year ago, as the group benefited from the exposure to Petroliam Nasional Bhd’s Refinery and Petrochemical Integrated Development (Rapid) in Johor.

An analyst with RHB Research Institute, Wan Mohd Zahidi, says in a Feb 17 report that Dialog is seeing increased contributions from its terminal operations in Kertih, Terengganu, and Tanjung Langsat and Pengerang in Johor. The Pengerang Independent Terminal is in the process of expansion.

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“We maintain our ‘buy’ recommendation on Dialog with a sum-of-parts-based target price of RM1.82. Its long-term growth plan remains intact, even in a low crude oil price environment, owing to its involvement in Rapid and the resilient tank terminal business,” Zahidi says in the report.

RHB’s RM1.82 target price implies a 15.2% upside potential from Dialog’s RM1.58 close last Wednesday.

While RHB’s target price is above Bloomberg’s consensus of RM1.72, it is below AmInvestment Bank’s target price of RM1.97 apiece, Maybank Investment Bank and Credit Suisse’s target price of RM1.90 and JP Morgan’s RM1.85 apiece.

At the time of writing, there were eight “buy” calls, seven “hold” and zero “sell” recommendations on Dialog, according to Bloomberg data. Last Wednesday’s closing price was above the lowest three target prices set by Affin Hwang Investment Bank (RM1.51), BIMB Securities (RM1.53) and MIDF Amanah Investment (RM1.57).

Even so, those who agree Dialog should fetch more may want to consider its warrant, Dialog-WA, which has about a year to run before expiring on Feb 12, 2017.

Closing at 38 sen last Wednesday, Dialog–WA was at a small 0.63% discount to the underlying shares. It has a one-for-one conversion ratio and RM1.19 strike price.

If Dialog rises 15% to reach RHB’s RM1.82 target price, Dialog-WA should be worth 65.8% more at 63 sen, assuming zero premium to the underlying securities.

In the meantime, Dialog is rushing to finish the Pengerang deepwater jetty facility by July 2017 in time for the expected commencement of the operation of its LNG terminals. Its fabrication yard, meanwhile, is expected to remain busy following the award of the EPCC jobs for Phase 2 of the Pengerang Independent Terminal.