This article first appeared in The Edge Financial Daily on May 18, 2017 - May 24, 2017

Dialog Group Bhd
(May 17, RM1.94)
Maintain buy with a higher fair value of RM2.24: Currently, property agents’ asking price for industrial land in Sungai Rengit in Pengerang, Johor, has reached RM85 per sq ft (psf).

We have also raised Dialog Group Bhd’s financial year 2017 (FY17) to FY19 earnings by 4% to 7% as its nine months for financial year ended March 31, 2017 (9MFY17) normalised net profit of RM249 million, excluding lumpy gains of RM22 million mainly from an office-cum-warehouse sale in Singapore, came in above expectations, accounting for 77% of our FY17 earnings and 79% of street’s RM316 million.

For comparison, 9MFY16 accounted for 71% of FY16 earnings. The group also declared an interim dividend of 1.2 sen (+0.2 sen year-on-year [y-o-y]), above our expectations.

Dialog’s 9MFY17 normalised net profit rose by an estimated 15% y-o-y from an 87% surge in associate contribution to RM79 million with the full contribution of its Pengerang Phase 1 tank terminals and improved spot storage rates.

The overall improved 9MFY17 bottom line also benefited from higher progress work recognition for Pengerang Deepwater Phase 2, Samsung’s jetty topside works and a plasticiser plant for UPC Chemicals (M) Sdn Bhd in Kuantan, Pahang.

On a quarter-on-quarter comparison, Dialog’s third quarter FY17 core net profit gained 9% to RM94 million from the Pengerang progress works and higher specialist products sales in India, Russia and the Middle East.

The RM5.5 billion contract for the construction of Pengerang Deepwater Terminal (PDT) Phase 2 currently occupies Dialog’s fabrication, engineering and construction division, and underpins the group’s earnings over the next two to three years.

The group’s progress on the RM6.3 billion PDT Phase 2 is on track as the Refinery and Petrochemical Integrated Development (Rapid) complex remains on schedule with progressive completion in 2018 to 2019. Additionally, the RM2.7 billion liquefied natural gas (LNG) regasification plant and storage tanks, in which Dialog has a 25% equity stake, are scheduled for completion by end of 2017.

For the Pengerang LNG regasification project, in which two tanks with a combined capacity of 200,000 cu m are being built at a cost of RM2.7 billion, the first tank will be completed by July 2017 and the second tank by December 2017. This will cater to Petroliam Nasional Bhd’s 1,220mw power plant, which will also provide up to 1,480 tonnes per hour of steam for plants within the Rapid complex.

Currently, Dialog is trading at a 2018 price-earnings of 26 times, below its five-year peak of 29 times. We view the premium as justified given Dialog’s long-term recurring cash flow-generating businesses, which are largely cushioned from volatile crude oil price cycles. — AmInvestment Bank, May 17