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Friday, November 14, 2014

Dialog Group - The 123s of Pengerang tanks


Target RM1.85 (Stock Rating: ADD)

We left our recent meeting with Dialog's management feeling positive with the progress of the Pengerang tank terminal development. Phase 1 is almost complete while Phases 2 and 3 are ready for development. Despite a rollover, our target price falls as we lower our FY15-17 EPS to impute higher operating costs for both upstream and downstream operations as Dialog lays the foundation for future growth. We now value the stock at 21.2x CY16 P/E (formerly 23.4x CY15 P/E) as we scale back the target premium over our 16.3x target market P/E from 40% to 30% to reflect the current weak oil price sentiment. Pengerang's attractive prospects are the potential re-rating catalysts that support our Add call.

What Happened
Contributions from activities at Pengerang's 170-acre Phase 1 tank terminal were behind Dialog's 12% yoy rise in net profit to a new high in FY6/14. The contributions are expected to pick up in FY6/15 given the commencement of operations at Phases 1A and 1B, and completion of the construction of facilities at Phase 1C. We learned from our recent meeting with the management that Phase 1A has received no less than 50 crude oil shipments since the first shipment on 12 Apr 2014. Phase 1B (petroleum products) is also in operations while the construction of Phase 1C (crude oil) is near completion.

What We Think
We are encouraged by the swift development of Phase 1, which is expected to pave the way for Phases 2 and 3. To accommodate the anticipated increase in construction works, we understand that Dialog has expanded its yard from 35 acres in Jun 2012 to around 100 acres currently. The yard is adjacent to the project site. The bigger yard comes in handy as Dialog is also eyeing opportunities at Petronas's refinery and petrochemical integrated development (RAPID) next door. RAPID received the much-awaited final investment decision in Apr 2014.

What You Should Do
We advise investors to accumulate the stock to take advantage of the share price correction. Dialog is by far the biggest winner of oil & gas investments under the government's Economic Transformation Programme through its involvement in both downstream (Pengerang tank terminals) and upstream (production-sharing contracts, risk service contracts and enhanced oil recovery).

Source: CIMB Daybreak - 14 November 2014, Full PDF Report

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