Dialog a core oil and gas holding for investors, says CIMB Research

CIMB Equities Research expects Dialog Group Bhd to deliver strong earnings growth from next year onwards.

KUALA LUMPUR: Dialog Group’s core net profit for the nine months ended March 31, 2018 made up 83.3% of CIMB Equities Research’s previous full-year forecast and 76% of consensus, outperforming due to higher oil prices, among others.

It said on Thursday Dialog is steadily executing the expansion of the tank terminals at Pengerang SPV1, Langsat 3, and recently kicked off the land reclamation of Pengerang Phase 3.  

“We believe that Dialog remains a core O&G holding for investors with superior long-term growth prospects, hence we maintain our Add call and discounted cashflow (DCF) based target price (RM4).  

“Share price catalysts include the future announcement of an off-taker for the tanks at Pengerang Phase 3, and the successful conclusion of the Kertih lease extension,” it said.

CIMB Research said Dialog’s 3QFY18 core net profit was 35% higher on-year, despite a revenue decline of 5% year-on-year. The drop in revenue was probably due to the slower pace of EPCC (Engineering, Procurement, Construction and Commissioning) revenue, as the construction works at the Pengerang SPV2 tanks are gradually tailing off. 

In the previous year, Dialog was busy with the tank and jetty topside construction works at Pengerang SPV2, and the construction of the plasticiser plant for UPC Chemicals in Kuantan.  

Despite the drop in revenue, earnings before interest, tax, depreciation, and amortisation (EBITDA) actually rose 46% year-on-year in 3QFY18, as the Langsat terminals were consolidated from 29 Sep 2017. 

Since the Langsat terminals enjoy EBITDA margin in excess of 90%, the additional EBITDA from the consolidation of Langsat more than offset the lower EBITDA from the slower pace of EPCC revenue recognition, as the latter typically sees EBITDA margin of 5-10% only.  

Brent crude oil prices averaged US$67/bbl in 3QFY18, against only US$54/bbl in 3QFY17. Dialog benefitted by way of higher revenue and profits at wholly-owned Dialog Resources Sdn Bhd, which has a 20% interest in the D35, D21, and J4 Production Sharing Contract (PSC) offshore Sarawak. 

CIMB Research pointed out that during 3QFY17, the Langsat terminals were still consolidated as a 44% JV. But in 3QFY18, Langsat was no longer booked at the associate level. 

Despite this, Dialog’s share of its associate/JV earnings rose 11% year-on-year during 3QFY18, as higher oil prices boosted profits of its 50%-owned Halliburton Bayan Petroleum Sdn Bhd, which has an Oilfield Service Contract (OSC) with Petronas Carigali to enhance the recoverable reserves at the Bayan field, offshore Sarawak. 

While Dialog has an upstream business that is seeing higher profits on the back of higher oil prices, it is partially offset by lower profits at the independent terminal at Pengerang SPV1, which is chartered on a short-term basis (less than five years). 

SPV1 is now probably seeing utilisation at 75-80%, from full utilisation two years ago, and spot leasing rates have also dropped materially. 

The impact on earnings from SPV1 is mitigated by the gradual expiry of contracts which average 1-2 years’ duration. 

Still, Dialog’s Kertih, Pengerang SPV2 and SPV3 terminals are chartered on a long-term take-or-pay basis, while the Langsat terminals and the upcoming Pengerang Phase 3 are/will be leased on a medium-term basis, protecting Dialog from short-term volatility. 

Also, Dialog’s ongoing expansion of Pengerang Phase 1 and the Langsat terminals, plus the recent launch of Pengerang Phase 3, will underpin long-term EPS growth, said CIMB Research.