Plenty of future growth available in Pengerang for Dialog, outlook bright
25 April 2019
Source: The Malaysian Reserve
WE LIKE Dialog Group Bhd for its consistent earnings growth profile (9%-22%), rising ROE (12.4%-14.2%), and recurring income business model. Rerating catalysts in our view would rest on earnings growth from Pengerang Terminal (Two) Sdn Bhd (PT2SB), upstream segment amid rising oil prices and news flow of Pengerang Terminal Phase 3 (PTP3) initial investment.
Aplenty of future growth is available in Pengerang, including capacity expansion on buffer land, engineering, procurement, construction and commissioning (EPCC) and plant maintenance job opportunities and potential venture into petrochemical space. Thus, we initiate coverage on Dialog with a 'Buy' rating at a TP of RM3.76 (+18% upside), based on SOTP valuation.
Resilient business model. Dialog's consistent earnings 10-year C AGR of 19% even during the industry downturn back in 2014 amid sharp decline in oil prices has proven its defensive business model against oil price volatility.
Exciting growth in FY20. Dialog is expected to achieve 22% earnings growth in FY20 (versus five-year historical CAGR of 19%) on" the back of 54% growth in its JV and associate contribution (PT2SB). Meanwhile, net margins next three years are expected to improve to 18.9%-20% from 13.8% in FY18 following consolidation of Langsat terminals and lower proportion of EPCC and fabrication income.
Crystallising PTP3. Land reclamation of 300 acres (121ha) for PTP3 is currently 47% completed and slated for completion by end of CY19. Dialog is in the middle of finalising its Phase 3A investment plan with the initial investment cost of RM2.5b. We believe the announcement of Phase 3 plan (possibly this year) would provide clarity on the potential client profile, equity stake, capacity and etc. Note that we have imputed RM0.56/ share based on expected value of DCF assuming equity stake of 25%- 49%, 17% IRR, RM5b capex,- 70:30 debt equity ratio, 5.7% WACC.
Emerging as a strong potential JV candidate. With the management's intention to venture into petrochemical space via an equity stake, Dialog, in our view, could appear to be a strong JV partner for foreign players which intend to build a plant in Malaysia given its vast experience in EPCC, plant maintenance and deepwater terminal in Pengerang.