Dialog propelled by Rapid development

02 Sept 2017
Source: The Star

By INTAN FARHANA ZAINUL
intanzainul@thestar.com.my

Oil and gas company reaps benefits from going downstream

Oil and gas hub:Artist impression of Dialog Group's oil storage terminal in Pengerang.

A snapshot on Dialog
Market Capitalisation RM11.56bil
Price earnings ratio (historical) 29.84
Financial year ended June 30 2013 2014 2015 2016 2017
REVENUE (RM bil) 2.24 2.55 2.36 2.53 3.39
Net profit (RM mil) 193.30 215.87 275.13 294.93 370.64
Earnings per share (sen) 4.0 4.4 5.5 5.7 6.88
Net asset per share (sen) 27.8 31.8 39.8 46.7 57.8
Dividend per share (sen) 3.30 3.10 2.20 2.20 2.65
Source: Dialog ©The Star Graphics

IT is obvious now that homegrown oil and gas company Dialog Group Bhd made the right decision many years ago to venture into the downstream segment. The company, though, had not always been the favoured oil and gas stock in the past. That said, it has grown its market capitalisation from RM55mil when it listed in 1996 to more than RM11bil today.

But going downstream into oil and gas was not seen as sexy as those who went looking to find the black gold.

Today, Dialog sticks out as one of the best performing locally listed oil and gas firms in terms of its earnings.

And its shares have performed resiliendy throughout the recent years of sluggish oil prices.

Many oil and gas service providers in Malaysia are in the upstream segment, so when crude oil prices took a dive in September 2014, these company's took a big hit.

But Dialog's portfolio of assets has helped it secure solid earnings, which at times came out way above consensus analyst expectations. Its share hit an all-time high of above RM2 this week, which leaves the company trading at a historical price earnings multiple of 29 times earnings.

The rise in the share price was a result of the company's stellar performance for its financial year ended June 30 that prompted several research houses to upgrade their earnings forecast for Dialog.

Another catalyst was this: the unwavering commitment to downstream activities by national oil company, Petronas Nasional Malaysia. This is particularly in reference to Petronas' Refinery and Petrochemical Integrated Development (Rapid) project in the Pengerang Integrated Petroleum Complex (PIPC).

With Petronas fully committed to complete its Rapid project by 2019, Dialog is set to benefit from its oil storage project in Pengerang Johor.

Notably, Dialog's Pengerang Deepwater Terminal (PDT) is located just next to Petronas's Rapid development and has three development phases.

Phase 1 involves building a tankage facility for the handling, storage, blending and distribution of oil.

This facility is already up and running since 2015 with 1.3 million cubic meters capacity.

Dialog's joint venture partner in the project, Netherland-based Royal Vopak, has announced its intention to expand the capacity of its phase 1 project by some 30%. Vopak is the world's largest independent tank storage company in terms of capacity, with a market capitalisation of some 5.31bil euros (RM26.5bil).

Dialog's equity portion of Phase 1 of the PDT stands at 46% with Vopak owning 44%.

For Phase 2 of the PDT, Dialog has 25% equity in the vehicle that will undertake the project, with other shareholders being Petronas (40%), Vopak (25%) and the Johor State (10%).

Meanwhile, construction of PDT's phase 2 is ongoing and involves a larger storage capacity of 2.1 million cubic meters.

Analysts say this second phase of Dialog's PDT project will provide Dialog with solid recurring revenues.

According to Dialog's website, phase 2 of PDT will have facilities for handling, storage and distribution of the crude oil, petroleum, chemical and petrochemical feedstock products together with its ancillary by products, to and from the Rapid complex at Pengerang.

Another part of phase 2 is the RM2.7bil liquefied natural gas regasification facilities in which Dialog has partnered with Petronas Gas Bhd and the Johor state.

Kenanga Research says Dialog's earnings growth in 2018 and 2019 would be anchored by works such as its engineering, procurement, construction and commissioning (EPCC) in phase 2 and the expansion of phase 1. Dialog had first begun as an EPCC contractor and had then ventured into operating oil storage facilities.

"We believe Dialog is able to capitalise the demand of maintenance work for these storage facilities, refineries and its associated assets given existing maintenance relationship with Petronas Chemicals Group Bhd," it says in a report.

Dialog is currendy in the midst of securing new potential partners for Phase 3 to build more petroleum and petrochemical storage terminals.

Bloomberg data shows that analysts favour Dialog, with 10 out of 15 analysts recommending a "buy" at an average target price of RM2.14, while the remaining have a "hold" recommendation.

The counter closed at RM2.04 on Thursday.

At the current price, Dialog's share price is commanding a lower valuation compared with other local heavyweights in the O&G sector such as Sapura Energy Bhd. Dialog is currently trading at historical price-earnings ratio of 29.6 times, while Sapura trades at 66.8 times.

Maybank Investment Bank Research has forecast a compounded annual growth rate of 14% on Dialog's net profit for the next three-years (FY18-FY20), driven by the group's phase 2 of PDT project, in which Dialog has a 25% stake.

"Dialog's strong cashflows, atypical to the industry, largely from its tank terminal operations, will support the higher dividends," it says.

Dialog posted a three-fold jump in net profit to RM103.5mil in the fourth quarter ended June 30, lifting its full-year earnings to a new high of RM370.6mil. Revenue for the full year climbed 34% to RM3.39bil.

Its bottomline and topline performance for the period was underpinned by tank farm and deepwater terminal joint-venture projects in Johor.

According to Publiclnvest Research, analysts had underestimated Dialog's earnings growth for FY17, which exceeded consensus expectation of 117%.

Although the crude oil price has been on the rise over the last eight weeks, some analysts remain unexcited over the O&G sector.

As upstream investments have been cut sharply, oil services activities will remain subdued in the coming year.

However, the downstream investments have been healthy especially the development of Rapid in Pengerang.

"Difficult to identify silver lining for local upstream O&G companies. Although consensus is forecasting an oil price uptrend to US$58/bbl by 2018, Petronas is budgeting its activities based on US$45-US$55 per barrel for the next 3-4 years," UOB KayHian says.

On a contrarian view, Maybank IB reckons that the O&G sector has bottomed and is on a cyclical recovery.

"On the domestic front, we are seeing a revival in upstream activities such as rising drilling works.

"Tenders pipeline are also on the rise, of which most offshore support vessels and maintenance are back-loaded into the second half of this year," the research house says.

Malaysia has around 30 listed companies related to the oil and gas sector.

However, since the oil price collapse of 2014, many of these companies are struggling. Their predicament does not seem to have improved much despite oil prices having improved since last year.

As for Dialog though, it has been consistendy profitable, thanks to its correct bet on the particular area of downstream activities in the oil and gas sector. And with Petronas going full steam ahead with Rapid, things have worked out well for Dialog.


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