Dialog Group - Growing base of multiple recurring income streams BUY

- We maintain our BUY call on Dialog Group (Dialog), with a slightly higher sum-of-parts-derived fair value of RM3.16/share (vs. the earlier RM3.14/share) as we have rolled forward the PE target from 18x FY13F to 16x FY14F for the group’s specialist services & products, catalyst handling and plant maintenance services. 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 have maintained FY14F-FY15F net profits but cut FY13F earnings by 13% on a 1ppt reduction in EBIT margin assumption due to minimal initial contributions from the group’s engineering, procurement and construction (EPC)  division in Pengerang. 

- Dialog’s 1HFY13 net profit of RM94mil (+10% YoY) came in below expectations, accounting for 40% of our earlier FY13F earnings and 43% of street estimate’s RM222mil. 

- Dialog’s 2QFY13 revenue rose 21% QoQ to RM503mil due to recognition of construction activities at the group’s tank terminal project in Pengerang, but pre-tax profit was flat sequentially at RM43mil due to:- (1) minimal profit recognition in the early stage of the Pengerang project, and (2) cost overrun for one of the group’s plant maintenance projects in Singapore. 

- YoY, the group’s 1HFY13 net profit rose at a slower pace of 10% vis-à-vis its stronger topline growth of 21% due to the significant increase in low-margin EPC activities in the tank terminal fabrication works in Johor.

- Dialog has progressed well beyond the land reclamation work for 150 acres and is now undertaking the fabrication of 1.3mil cu metres of tank terminal capacity with first oil commissioning in 2014. The launch of the subsequent Phases 2 and 3 and additional liquefied natural gas terminal projects are expected to gain momentum when Petronas approves the final investment decision by the middle of this year for the Refinery And Petrochemical Integrated Development project.

- On a separate note, the group’s pre-development stage is going well for its Balai marginal cluster field project with jointventure partners RocOil and Petronas Carigali. Currently, the first 2 appraisal wells have yielded positive results and the consortium is drilling a third well. 

- Further news flow on the group’s 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 could significantly contribute the Dialog’s prospective earnings momentum. 

- The stock currently trades at an attractive FY14F PE of 18x, below its 2007 peak of 40x.  

Source: AmeSecurities