Steady recurring income expansion expected for Dialog

Dialog Group Bhd (Nov 13, RM3.27)

Maintain buy with an unchanged fair value of RM3.90: We reiterate our “buy” recommendation on Dialog Group Bhd with an unchanged sum-of-parts-based (SOP) fair value of RM3.90 per share, implying a rolled forward financial year 2020 (FY20) estimated price-earnings ratio (PE) of 38 times — 15% below its five-year peak of 46 times. Our SOP values a 650-acre (263.05ha) buffer land in Pengerang, Johor at RM80 per sq ft. 

We maintained Dialog’s FY19 to FY20 earnings as its first quarter of FY19 (1QFY19) net profit of RM115 million came in within expectations, accounting for 23% of our FY19 net profit forecast and 24% of street’s forecast. As a comparison, 1QFY16 to 1QFY18 earnings accounted for 17% to 21% of their respective years. As expected, Dialog did not declare any interim dividend. 

For comparison of core earnings, we have excluded 2QFY18 exceptional fair value gain of RM66 million from the acquisition of an effective 36% equity stake in the Tanjung Langsat tank terminals in Johor for RM137 million in cash from MISC Bhd. Dialog’s 1QFY19 core net profit rose 20% year-on-year mainly due to the recognition of Pengerang Deepwater Terminal (PDT) 1 and the liquefied natural gas regasification plant, which commenced operations in November 2017. 

This was partly offset by a lower progress work recognition for the final stages of PDT phase 2.

Excluding a RM10 million gain from the disposal of a petrol station in 4QFY18, the engineering, procurement, construction and commissioning works for PDT2 mainly drove Dialog’s 1QFY19 net profit up 9.3% quarter-on-quarter. Notwithstanding Dialog’s extensive overseas operations, the group’s main earnings driver still stems from domestic operations accounting for 88% of 1QFY19 pre-tax profit, notwithstanding a drop from 95% in 1QFY19. 

The group’s progress on the RM6.3 billion PDT phase 2 is on track as the refinery and petrochemical integrated development complex remains on schedule with progressive completion beginning early 2019. In April 2018, the group signed a memorandum of understanding with the Johor state government to develop PDT phase 3, involving the construction of petroleum or petrochemical storage and a third jetty at an indicative initial cost of RM2.5 billion, in which Dialog will have an 80% equity stake and the Johor state 20%. 

We expect the subsequent investments by other joint-venture partners to reduce Dialog’s stake, while boosting phase 3’s total investment value given that phase 2 had reached RM7.8 billion in a reclaimed area half the size of phase 3. This will be part of a 500-acre (202.34ha) zone comprising more reclaimable land and the adjoining buffer zone. Additionally, Dialog will be expanding its dormant Langsat Terminal 3 into a 300,000 m3 storage facility. 

Dialog trades at a FY20 forecast PE of 32 times, below its five-year peak of 46 times. We view its higher-than-peer premium as justified given Dialog’s long-term recurring cash flow-generating businesses, largely cushioned from volatile crude oil price cycles, and further underpinned by the Pengerang development’s multi-year value rerating bonanza together with a healthy net cash balance. — AmInvestment Bank, Nov 13

This article first appeared in The Edge Financial Daily, on Nov 14, 2018.

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