Dialog Group - Strategically poised for growth in recurring earnings Buy

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

- We maintain FY13F-FY15F net profits, which were raised yesterday after the announcement of the Bayan enhanced oil recovery (EOR) project with Halliburton. Also, Dialog’s 1QFY13 net profit of RM47mil came in within expectations, accounting for 20% of our FY13F earnings of RM240mil and 22% of street estimate of RM222mil. 

- Dialog’s 1QFY13 net profit slid slightly by 6% QoQ in tandem with a 17% decline in revenue due to fewer plant maintenance projects in Malaysia and Singapore. We note that the group’s first financial quarters tend to be weaker QoQ.  

- But YoY, 1QFY13 net profit rose 5% due to:- (1) recognition of engineering, procurement and construction progress  for Pengerang Phase 1, which has reached past the completion stage of 25%, (2) Higher specialist products and services, and (3) maiden contribution of the offshore supply base in Jubail in Saudi Arabia. 

- Dialog has progressed beyond the land reclamation work for the 150 acres and is now undertaking the fabrication of 1.3mil cu metres of tank terminal capacity. The launching of the subsequent Phases 2-3 and LNG projects are dependent on Petronas approving the final investment decision for the Refinery And Petrochemical Integrated Development project.

- The group’s pre-development stage is still ongoing for its Balai cluster field project with joint-venture partners RocOil and Petronas Carigali. While the actual development phase could take up to 2 years, we understand that there could be some early oil production next year from the pre-development work.

- The recent 50:50 joint-venture with Halliburton Energy Services in a 24-year oilfield service contract to redevelop the matured Bayan oilfield off Sarawak with a project cost of US$1.2bil will continue to fuel excitement for the stock, as the maiden EOR contract will significantly contribute the Dialog’s prospective earnings momentum. 

- 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 an estimated 5mil cu metres to 8-10mil cu metres, 2) Commencement of the Balai marginal field and Bayan EOR projects, 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 upstream operations. 

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

Source: AmeSecurities