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Friday, April 17, 2015

Dialog - Expecting a Better 2HFY15

We maintain a BUY recommendation on Dialog with an upgraded SOP TP of MYR1.90 (+14% upside). We think Dialog has the potential to develop additional storage capacity in its tank terminals given the high demand. We expect better prospects for E&P from both production ramp up and also a recovery in the price of oil going forward. Our upgraded forecasts anticipate better 2HFY15 from the JV businesses.
  • Three is not enough, in Dialog’s busy Pengerang Independent Deepwater Terminal (PDT). We understand Phase 1C has received first oil and will be ramped up through the commissioning phase. Phases 1A and 1C are fully utilized with long term contracts (average 2+1 years) secured. Phase 1B has a different customer mix; we estimate contract tenures between 3-6 months. While Phases 1-3 are under full scale development, we see re-rating catalysts to depend on the potential for Phase 1 expansion (~1m cbm storage on top of 1.3m cbm). Also Phase 4 and beyond are on the cards to contribute to Malaysia’s liquefied natural gas (LNG) hub ambitions. Phases 2 & 3 will be dedicated terminals for RAPID for the petroleum/petrochemical and LNG storage. We believe storage rates will remain favourable, given high demand and conservatively assume storage rates of between SGD4-6.50/cbm.
  • Earnings forecasts upgraded by 8%/3% for FY15F/FY16F. We expect margin expansion and stronger 2HFY15 due to increased contributions from Phase 1C of PDT, EPCC and the D21/J5 production sharing contract (PSC). We expect a recovery in oil price to also boost FY16F earnings. Although material earnings from Phases 2 & 3 will only occur in FY18 at the earliest (from LNG), we estimate the EPCC cost to be spread out over 4-5 years as part of our assumption for MYR1bn of EPCC contracts pa. Dialog expects its net gearing to increase to 0.5x from 0.2x, which is also in line with our forecasts.
  • Maintain BUY, with a higher SOP TP MYR1.90 (from MYR1.65). This implies a 31x FY16F P/E within the stock’s 5 -year average forward P/E band of 30x per Fig 5 (Dialog currently trades at 28x P/E). Long term value remains attractive; its storage hub aspires to become the Rotterdam of Asia. It is also the best beneficiary in an oil contango situation, in line with our expectations of long-term Brent of USD80/bbl.Dialog’s upstream risks are minor in our view, a prove of the stock’s strong defensive qualities - the storage terminals and core downstream businesses already make up 95% of our SOP estimate (see Figure 1).

Expecting Better 2HFY15 Risks to our valuation would be higher than expected costs given that the group is undergoing a business expansion. Oil price remains a key risk as it directly affects its upstream activities, while a mismatch of oil price expectations (or the timing of a major recovery) could complicate storage customers from locking in spot or long term contracts with Dialog’s terminals.

Stress test scenario. We assumed crude oil falls to USD40/bbl, storage utilization falls by 15% and a decline in downstream services revenue by 30%. We also assumed 18x P/E only for the valuation of the core downstream services.PDT updates. Dialog remains busy in the Pengerang Independent Deepwater Terminal (PDT). It had surpassed its 100thshipment for Phase 1. Vopak (Dialog’s PDT partner) mentioned in a Feb 2015 StarBiz article that customers like BP (BP LN, NR) and Total (FP FP, NR) leased storage space. We believe that this forms a major part of the take-up rate for Phase 1C, which will be ramped up after commissioning phase from 3QFY15 onwards. Hence, Phases 1A and 1C are fully utilized and locked in for long term contracts (average 2+1 years). Phase 1B has a different customer mix and the average contract tenures are negotiated at intervals between 3-6 months. While Phases 1-3 are all undergoing full scale development, we see potential to develop Phase 1 expansion (additional ~1m cbm storage from 1.3m cbm) given encouraging enquiries from customers. Further phases (Phase 4 and beyond) could be planned to contribute to the development of Malaysia’s liquefied natural gas (LNG) hub. We see storage rates to remain favourable, helped by the expansion of the Means of Platts FOB pricing to the Straits (eff. July 2015) and the contango situation in the oil markets.
SOP valuation changes. We remodeled our SOP valuation for the storage terminalsand included the potential expansion projects for Phase 1. We assumed a mid-point EBITDA margin between management’s guidance of 70-80% and the key competitors’ margins, namely Oiltank (60%) and Vopak (50%). That translates to PAT margins of 35-50%, vs that of Oiltank (46%) and Vopak (28%). The average IRR for our tank terminal valuations are 15-20%, in line with the industry and management’s expectations of a minimum 10%. We have inputted two key assumptions : i) storage rates between SGD4-6.5/cbm, at a slight discount to industry storage rates of SGD5-7/cbm currently, ii) assuming an additional 30% of revenue is generated from ancillary and throughput services. We assume high 90% utilization for PDT as Phase 1 is in high demand and Phases 2 and 3 should be fully dedicated to the needs of Refinery and Petrochemical Integrated Development (RAPID). For the upstream businesses, we adjusted our SOP which was lowered by our current assumption of FY15F/FY16F crude oil prices of USD72/bbl and USD80/bbl respectively, vs USD80/bbl and USD90/bbl earlier. We also modified the revenue formula for the PSC to include some discounting element due to the directi on of gas prices from its gas sales agreements. We included the PSC’s EOR and infield drilling increment (Roc Oil’s estimates) to the production profile. Our earlier SOP assumed just the base case production and underestimated the PSC’s potential, which ha s the support of a “progressive volume structure” fiscal regime when cumulative production targets are met. In the event of recovering oil prices, we see future capex for infield drilling and enhance oil recovery (EOR) to be more feasible. Our higher expectation for the PSC was offset by our decision to remove the risk service contract from our SOP, in order to be conservative.

Source: RHB Research - 17 Apr 2015

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