This article first appeared in The Edge Financial Daily on March 18, 2020 - March 24, 2020

Dialog Group Bhd
(March 17, RM2.91)
Maintain buy with a lower target price of RM3.66: Pending further clarification from Petroliam Nasional Bhd (Petronas), we are still unclear as to the extent of damage and the cause of the fire and explosion at the Pengerang Integrated Complex. Dialog Group Bhd’s independent tank terminal could benefit from higher storage demand, but its upstream earnings could be dampened under the current low oil price environment. We continue to like this counter for its defensive earnings profile, solid return on equity and recurring income-business model.

Note that Dialog’s 25%-owned Pengerang Terminals (Two) Sdn Bhd, which serves Petronas as a dedicated tank terminal, is structured on a take-or-pay basis. Its earnings are unlikely to be affected even if there is a delay in the commercialisation of Pengerang’s plants.

We were guided that the upstream segment contributed about 10% to 15% of Dialog’s earnings for the financial year ended June 30, 2019 (FY19), half of which were attributable to the 20%-owned D35/D21/J4 production-sharing contract. Earnings from these assets are directly correlated with oil prices, while the remaining half are related to other upstream products and services that are more dependent on upstream activity. Overall, we expect a weaker FY20 contribution from this segment on lower upstream activity amid decreased oil prices.

Under the current crude price contango, crude storage demand is likely to increase as more traders are buying more crude. This may benefit Dialog’s 46%-owned independent tank terminal facilities — Pengerang Independent Terminals Sdn Bhd — which ran at 80% to 90% utilisation in the first half of FY20.

We trim our FY20 to FY22 earnings forecasts by 3% to 4% after lowering our estimates of the net profit contribution from the upstream segment. Dialog is expected to lock in more off-takers for its Phase 3A investment plan, with an initial investment of RM2.5 billion. Note that we have factored in an additional five million cu m of capacity for Phase 3 of Pengerang Deepwater Terminals, resulting in a discounted cash flow-derived value of 57 sen per share — assuming an average equity stake of 35%, a 17% internal rate of return, RM5 billion capital expenditure, a 70:30 debt-to-equity ratio and a 5.9% weighted average cost of capital. — RHB Research Institute, March 17