Dialog Group - No earnings yet from Pengerang land reclamation BUY

- We maintain our BUY call on Dialog Group (Dialog) with an unchanged sum-of-parts-derived fair value of RM2.85/share. Our fair value implies an FY12F PE of 29x, above its three-year average of 25x but below its peak of 40x in 2007.

- While we have cut FY12F net profit by 12%, our fair value is maintained as we have rolled forward P/E targets from 18-20x FY12F to 15-18x FY13F for the group’s technical/specialist, advanced catalyst handling, plant maintenance services and fabrication services. We have only fine-tuned FY13F-FY14F net profits as the progress of the fabrication of the Pengerang tank terminal Phase 1 project will support the group’s earnings growth trajectory.

- Dialog’s 9MFY12 net profit of RM127mil (+19% YoY) came in below expectations, accounting for 62% of FY12F net profit of RM205mil and 65% of street’s estimate of RM195mil. This was due to 3QFY12 EBITDA margin sliding 1ppt to 12% as  the group had not recognised any profit from the early stage of the engineering, procurement and construction work for  the Pengerang Phase 1 land reclamation for 150-acres of land, which will later involve the construction of tank terminals with the capacity of 1.3mil cu metres. For comparison, 9MFY11 accounted for a higher 70% of FY11 net profit. 

- Interim single-tier dividend of 1.1 sen was 15% lower YoY, with the payout ratio falling from 24% to 19% due to Dialog’s enlarged share base after the completion of its 2-for-10 rights issue on 15 February this year. 

- The group’s 3QFY12 revenue rose 17% QoQ to RM420mil but net profit was flat QoQ due to the absence of profit recognition from the Pengerang land reclamation work and higher minority interest charge. 

- We expect a stronger 4QFY12 as the pace of earnings recognition for its tank terminal operations is expected to accelerate as the 76,000 cu metre-Tanjung Langsat Terminal 1 phase 3 was completed in August 2011 while the 171,000 cu metre-Langsat Terminal 2 was completed in December  last year, with initial start-up costs expected to be fully charged off. But we expect minimal initial earnings contribution from the group’s 60%-owned Jubail Supply Base, which was completed recently.

- We remain positive about the group’s expanding recurring earnings profile which stems from:-1) Further expansion in tank terminal operations in Pengerang, potentially  from a projected 5mil cu metres to 8-10mil cu metres which could raise our SOP further by 13% to RM3.21/share, 2) Potentially 2 new small field concessions added to the Balai project, and 3) Synergising engineering/construction, fabrication, specialist products/services and maintenance operations which  can further leverage on the growth of the group’s expanding tank terminal and marginal field operations.

- The stock currently trades at an attractive FY13F PE of 23x, below its 2007 peak of 40x.  

Source: AmeSecurities