Dialog Group Bhd 
(March 20, RM1.55)
Maintain market perform with unchanged target price of RM1.67. Dialog announced that it is required to invest in special purpose vehicle (SPV) 2 (Pengerang Terminal Phase 2) and SPV 3 (Pengerang LNG project) via an injection of funds.

We were not entirely surprised by the announcement as Dialog had the intention of proceeding with the two projects. We believe Dialog needs to raise funds given the huge capital expenditure (capex) commitment. 

Assuming a 10% share placement by the group, some RM800 million in proceeds could be raised based on the price of RM1.56 per share. This would be equivalent to 30% of the total capex commitment. 

We also do not discount the possibility of a rights issuance as an alternative.

Pengerang Terminal Phase 1 will soon be running full steam with Phase 1A and 1B commencing operations, and 1C under commissioning at present.

Phase 2 is certain to proceed under the shareholders’ agreement signed with Vopak Terminal Pengerang for the development and construction of storage facilities for the refinery and petrochemicals integrated development (Rapid) complex. 

It is expected to add another 2.1 million coalbed methane (CBM) of storage capacity targeted to reach completion by 2019. 

This is also expected to contribute positively to the group’s engineering, procurement, construction and commissioning (EPCC) division with Dialog’s portion amounting to RM5.5 billion.

Dialog also announced that it had entered into a joint venture, with a 25% stake in the upcoming Pengerang regasification project. Earnings are expected by 2018.

Overall, we believe that the group is on track to build on its long-term recurring income stream generating asset base with multiple tank terminals put in place to capitalise on the potential growth in Malaysia’s downstream sector in Rapid.

Risks to our call include the delay in in-house EPCC jobs and new capex-intensive projects which drain cash flows. — Kenanga IB Research, March 20

This article first appeared in The Edge Financial Daily, on March 23, 2015.