Dialog Group Bhd
(Jan 3, RM1.87)
Maintain outperform at RM1.79 with revised fair value of RM2.11 (from RM1.94): The company announced last week that it had won a contract from Asean Bintulu Fertiliser (ABF) for the engineering, procurement, construction, commissioning (EPCC) and associated works for a new cooling tower at Bintulu. The contract is worth RM64.6 million and is expected to be completed by September 2011.
The contract is Dialog’s third contract announcement for 2010, and based on our assumption of 8% earnings before interest, tax, depreciation and amortisation (Ebitda) margins for EPCC works, the project will yield about RM5.2 million in Ebitda earnings.
We expect the company’s EPCC to grow further once it starts construction on its massive Pengerang deepwater tank terminal. The EIA study is expected to be completed by 1QCY11, after which land reclamation could take another year. Post that, the construction of Phase 1 of the terminal could be another 18 to 24 months. As such, operations for Phase 1 would be up in FY13 the earliest.
As we currently expect the company to start construction of the Pengerang tank terminal by early CY12, we have increased our FY12/13 EPCC revenue by RM600 million (we expect Phase 1 of the Pengerang tank terminal to take two years). We have also fine-tuned our assumptions of Phase 1 of the Pengerang tank terminal and currently assume the capacity to commence by FY14 (instead of FY13 previously). Our FY12/13 net earnings have correspondingly increased by 18.1% and 7.3% respectively.
Risks include slower than expected construction of the Pengerang tank terminal; and weaker than expected operations from other segments of the company.
Our new fair value for the stock is RM2.11 (RM1.94 previously) based on an unchanged 19 times on CY11 price-earnings ratio and discounted cash flow on its tank terminal business. We highlight that our net present value valuations for the Pengerang tank terminal only incorporate a capacity of 1.2 million cu m, as the storage capacity for the subsequent phases is still far off at this juncture. This suggests further upside for the stock going forward. Given our positive view, we reiterate our “outperform” call on the stock. — RHB Research Institute, Jan 3
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