We are positive on DIALOG’s move to take full control of Langsat after purchasing the remaining 20% stake in Langsat 1 and 2 for RM62.6m as this will increase their total group’s effective tank capacity by 10% and further contribute c.RM6m/annum to their recurring stream of income. Reiterate OUTPERFORM with a higher TP of RM3.80 with key catalysts being earnings growth delivery and further developments in Pengerang Phase 3.

Buying 20% Langsat stake from PUMA. Last Friday, DIALOG announced that it had acquired the remaining 20% stakes in Langsat Terminal (One) S/B and Langsat Terminal (Two) S/B (Langsat 1 and 2) from Puma Energy Asia Pacific B.V (PUMA) for a cumulative total value of RM62.6m. In addition, DIALOG will repay PUMA RM32.4m for the loans PUMA had previously extended to Langsat 1 and 2’s subsidiaries. The acquisition was completed on 7th June 2018.

Positive over the acquisition. We are positive on the additional 20% stake in Langsat 1 and 2 as this will increase DIALOG’s total effective tank capacity by 10% (to 1.46 million m3 from 1.33 million m3) and allow it to generate higher stable recurring incomes of c.RM6m/annum (+1.3% for FY19E) moving forward. We also find the purchase consideration PER of 10.4x a bargain as DIALOG had previously purchased the 36% effective interest in Langsat 1 and 2 from MISC at PER of 13.7x (consideration of RM137m) back in Sept 2017. Post- acquisition, DIALOG’s net gearing is still very manageable at 0.08x (from 0.06x as of 3Q18).

Still on expansion mode. Current construction progress for Pengerang Deepwater Terminal Phase 2 is intact with targeted completion in early FY19. Meanwhile, DIALOG is in the midst of securing partners for Pengerang Phase 3 (300 acres) to build more storage terminals. Recall that DIALOG has entered into a MoU with Johor State to further develop Pengerang Phase 3 in April 2018 with an initial investment amount of c.RM2.5b. The land reclamation contract for Pengerang Phase 3 has been awarded to Penta Ocean and we believe the entire 300 acres land could add storage terminals of 5m-6m m³ in phases, with the initial capex (of RM2.5b) adding c.2m m³ capacity.

Minor upgrade to FY19E estimates. Post-acquisition, we upgrade our FY19E earnings by 1.3% or RM6m after accounting for the additional 20% stake in Langsat 1 and 2. We make no changes to FY18E earnings as contributions from the acquisition would be minimal given that it will only contribute <1month of earnings contribution into FY18E (YE June).

Reiterate OUTPERFORM with higher SoP-derived TP of RM3.80 from RM3.70 after imputing for 100% stake from 80% previously in Langsat 1 and 2 into our valuations. With DIALOG being included in the FBMKLCI, as anticipated, we believe further positive share price catalysts could come from: (i) further earnings growth crystallization from recurring tank terminal business, and (ii) further concrete developments at Pengerang Phase 3. Downside risk to our call is a delay in its in-house EPCC jobs, which will further delay its future stream of income contributions from Pengerang Terminal Phase 1 expansion (1E), Phase 2 and Phase 3.

Source: Kenanga Research - 11 Jun 2018