Dialog expected to see higher upstream profits
Dialog Group Bhd
(Jan 16, RM2.90)
Maintain hold with a lower target price of RM2.95:
The Pengerang Phase 2 crude/product/ petrochemical storage terminal (PT2SB) completed construction on Dec 18.
PT2SB is now on schedule to undergo major commissioning phases. PT2SB is dedicated to the Refinery and Petrochemical Integrated Development (Rapid) complex requirements with take-or-pay earnings locked in for 25 years.
First, management confirmed the official start-up to be in the third quarter of 2019 (3Q19) which tallies with an earlier guidance from operator Vopak.
This is to be in line with the commissioning schedule of the Petronas complex, implying no earnings in financial year 2019 (FY19) but maiden earnings will fl ow in the fi rst quarter of FY20 (1QFY20).
Second, due to Rapid’s requirements, the capacity of PT2SB is reduced from 2.1 million cubic metres (cu m) originally to 1.5 million cu m as of October 2018, and recently to 1.3 million cu m.
We understand the project internal rate of return (IRR) remains at 8% to 10%, which implies the take-or-pay yearly earnings would be reduced in tandem with the resized capacity until Petronas updates its requirements in the future.
We had followed Vopak’s guidance and assumed FY20 start-up earnings for PT2SB, but did not factor in the capacity resize. Hence, we reduce our PT2SB valuation by 15 sen per share.
We now expect revenue to decline in FY19 due to the completion of PT2SB’s RM5.5 billion engineering, procurement, construction and commissioning (EPCC), which itself is a very significant EPCC project for the group.
Dialog Group Bhd is still executing EPCC for several other projects, including the Pengerang Phase 1E expansion (0.4 million cu m). Revenues from fabrication and the maintenance phases (O&M) for downstream projects are stable, growing at 10% to 15% per year.
Our FY19 earnings forecast still meet management’s guidance for 10% to 15% growth, given the fullyear eff ect of Pengerang Phase 2 LNG (PLNG2).
In FY18, PLNG2’s net profi t was RM47 million, representing eight months of contribution from November 2017.
Also, the high oil prices (in the first half of financial year 2019 [1HFY19])and boost in upstream production will lead to higher upstream profits.
We like Dialog’s defensive business model, with a recurring downstream income and its upstream assets benefitting from higher oil prices. We still exclude other longer-term upside, as Pengerang’s capacity can reach up to 15 million cu m (a total of five jetties).
Phase 3 expansion is still viable based on demand for chemical storage, and hence we do not foresee a risk of delayed expansion in our sum-of-parts.
Our “hold” call is due to a lack of near-term catalysts, and the resized capacity of Phase 2 could be a temporary negative investor reaction but the stock still off ers long-term upside, depending on contributions from new growth projects. Entry price is RM2.70. — UOB KayHian, Jan 16