Slight boost for Dialog from additional LGT 3 stakeSlight boost for Dialog from additional LGT 3 stake
WE REITERATE our 'Buy' recommendation on Dialog Group Bhd with an unchanged sum-of-parts (SOP) based fair value of RM3.90/share, which implies a rolled forward FY20F PE of 37x — 15% below its five-year average of 46x. Our valuation includes the 650- acre (263ha) buffer land in Pengerang, Johor being valued at RM80 psf.
We are positive on Dialog's acquisition of the remainin g 20% stake in the centralised tank terminal facilities in Tanjung Langsat 1 an d 2 from Puma Energy Asia Pacific BV for RM95m, including the assumption of RM32m debt due from Puma.
Operational since 2009 and strategically located nea r the international shipping lanes in the vicinity of Singapore, the two terminals have a total storage capacity of 647,000 cu m and are currently fully utilised on term contracts.
Both terminals are part of the storage and trading hub for oil and gas in Johor and are in the vicinity of one of the largest refining and petrochemicals, trading and storage centres in Asia.
Dialog also wholly owns the equity interests in Langsat Terminal (Three) Sdn Bhd* (LGT 3), which acquired two parcels of lease lands and a 100,000 cu m tank terminal in Tanjun g Langsat, Johor, in March 2018 for further capacity expansion.
As LGT 3 can support the development of another 300,000 cu m of storage capacity, Dialog's total tank terminal storage capacity in Tanjung Langsat could expand by 40% to lm.cu m.
Given Dialog's gross cash of RM1.3b an d a low O.lx net gearing as at Msirch 31, 2018, we expect the group's internal funds to easily finance the acquisition.
We estimate that the acquisition, which translates to a PE of 9x, could add RM9m or 2% to Dialog's FY19F earnings. As the increase will be insignificant to the group, our forecasts are unchanged for now.
Meanwhile, the main valuation rerating catalyst for the group stems from its Pengerang Deepwater Terminal (PDT) project. The group's progress on the RM6.3b PDT Phase 2 is on track as the Refinery and Petrochemical Integrated Development complex remains on schedule with progressive completion in early 2019.
Earlier this year, the group signed a memorandum of understanding with the Johor state government to develop Pengerang Phase 3, which involves the construction of petroleum/petrochemical storage and a third jetty at an indicative initial cost of RM2.5b, in which Dialog will have an 80% equity stake and the Johor state 20%.
We view its higher than peer premium as justified given Dialog's long-term recurring cash flow-generating businesses, which are largely cushioned from volatile crude oil price cycles, and further underpinned by the Pengerang , development's multiyear value rerating bonanz a together with a healthy balance sheet.