Dialog Group - Earnings re-accelerate with new Bayan EOR Buy

- We maintain our BUY call on Dialog Group (Dialog), but with a higher sum-of-parts-derived fair value of RM3.14/share (vs. an earlier RM2.85/share). Our revised fair value implies an FY14F PE of 25x – at parity to its three-year average but below its peak of 40x in 2007.

- We raise FY14F-FY15F net profits by 13%-22% from the significant contributions arising from the new Bayan enhanced oil recovery project with Haliburton. 

- As indicated earlier in our report on 14 September this year, Dialog has subscribed for a 50% equity interest in a JV with Halliburton International Inc to jointly manage an oilfield service contract, which involves the redevelopment of the Bayan field through enhanced oil recovery (EOR) activities. 

- This matured Bayan oil field is located near Dialog’s Balai cluster marginal field project, which involves four fields, ie Balai, Bentara, West Acis and Spaoh in water depths of 45-60 metres in Block SK306, 135km northwest of Bintulu, Sarawak. Hence, Dialog will able to leverage on the existing pipelines in the Balingian block, off Sarawak. 

- While management has not revealed the current production statistics of the Bayan field, we understand that the project cost of US$1.2bil (64% of Dialog’s current market capitalisation) will be progressively spread over many years. But revenue accrued from increased production, as the capital cost is being progressively spent, may begin to be recognised by FY14F onwards. 

- Assuming that the project cost covers 5 years, a project IRR of 15%, WAC of 7%, we estimate that the project will raise Dialog’s SOP by 10% to RM3.14/share.

- Given the group’s net cash of RM256mil currently and the progressive capex spending for the Bayan EOR, we understand that this project will be fully funded via external borrowings, including Dialog’s equity portion in the JV company, Halliburton Bayan Petroleum. Even if we assume an equity-to-debt ratio of 20:80 and that the entire capex of US$1.2bil were to be spent by end-FY13F, we estimate that Dialog’s net gearing would be marginal. 

- Hence, we are positive on the project, which will allow Dialog to further entrench itself in the upstream oil & gas business after the Balai marginal field and expand  the group’s recurring income stream. Additionally, the group can further offer its engineering, topside maintenance, and specialist services to drive revenue growth of Dialog’s other businesses. 

- The stock currently trades at an attractive FY14F PE of 19x, well below its 2007 peak of 40x.

Source: AmeSecurities