Dialog to see recurring revenue from Petronas 5-year contract
03 July 2019
Source: The Malaysian Reserve
WE REITERATE our 'Buy' recommendation on Dialog Group Bhd with an unchanged sum-of-parts (SOP) fair value of RM3.85/share, which implies an FY20F PE of 36x — 22% below its five-year peak of 46x. Our SOP values the 650-acre (263ha) buffer land in Pengerang, Johor, at RM80 psf.
On Monday, Dialog secured a five year group-wide master service agreement for integrated turnaround main mechanical and maintenance mechanical static services from Petroliam Nasional Bhd (Petronas), which has an option for extension.
Currently, Dialog provides such plant turnaround and daily maintenance services to Petronas on shorter term contracts for individual plants separately.
With this master service agreement on a longer duration, Dialog will be able to mor e effectively develop and expand its workforce towards servicing Petronas' operations, particularly land-based plant facilities.
Hence, we are positive on this development which provides improved visibility to Dialog's longterm recurring revenue, even though past service contracts tend to be renewed on a consistent basis.
However, we maintain our forecasts as management is unable to provide any guidance at this juncture for the potential increase in domestic-based service income.
Notwithstanding Dialog's extensive overseas operations, the group's main earnings driver still stems from the Malaysian operations which account for 90% of 9MFY19 pretax profit, up from 87% in 9MFY18.
The group has reached a progress stage of 62% for the 300-acre land reclamation of Pengerang Phase 3, which involves the construction of a petroleum/petrochemical storage and a third jetty at an indicative initial cost of RM2.5b, in which Dialog holds an 80% equity stake and the Johor state 20%.
This is in addition to a 500-acre zone comprising further reclaimable land and the adjoining buffer zone. Additionally, Dialog will be expanding its dormant Langsat Terminal 3 into a 300,000m3 storage facility.
Dialog trades at a CY20F PE of 31x — 33% below its five-year peak of 46x. We view its higher than peer premium as justified, given Dialog's long-term recurring cashflow-generating businesses, which are 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.