SUSTAINABLE EARNINGS: Dialog is making two sources of income streams from the CTF projects – one from EPCC jobs, another from operating the CTFs, says Teh. – AFP photo
O&G performer driven by concession operationsKUCHING: Dialog Group Bhd (Dialog) is regarded as a well-rounded player in the oil and gas (O&G) industry with its consistent fiscal performance and cumulative annual growth rates (CAGR), driven mostly by its concession operations.
Kenanga Investment Bank Bhd (Kenanga Investment) analyst Teh Kian Yeong told The Borneo Post, “It is a consistent performer, thanks to its sustainable earnings that backed by recurring incomes.
“The new Balai marginal fields project is a quantum leap project, which will lift its value chain to be a developer and producer of oil/gas field from a mere service provider previously.”
Teh expected to see more value accretion from the new Pengerang centralised tankage facility (CTF) which would sustain Dialog’s engineering, procurement, construction and commissioning (EPCC) work flows over the mid-term and operating cash flow over the long term.
“The recent awarded Balai marginal fields’ contract would be a quantum leap project to Dialog, which would elevate its value chain to a developer and producer from a service provider in the industry,” Teh highlighted.
He regarded Dialog as one of the leading integrated multi-disciplined technical service providers in the country with its ‘hospital concept’ business model which covers multiple stages in the upstream, right down to appraisal, development, production and maintenance stages in the downstream.
The group’s CTF generated stable and secured earnings, being backed by terminal usage agreements (TUA) which it signed with the users.
The group’s projected estimated earnings to grow at 28 per cent CAGR over the financial year 2012 (FY12) to FY14, mainly lead by EPCC jobs from the Pengerang CTF, the Langsat CTF’s LT3 and Balai marginal fields’ pre-development phase.
Currently, 60 per cent of its earnings were recurring, of which 43 per cent were derived from the CTF operations. This would support its net profit CAGR over the next three years.
Revenues from these CTFs were guaranteed under the 20-year or 30-year TUA period ‘take or pay’ concept. The two currently operating CTFs, namely Kertih CTF and Langsat CTF, contributed 43 per cent of the group’s earnings.
When Pengerang CTF and Langsat CTF’s LT3 start operating, they would contribute 50 per cent of the group’s earnings by FY14 estimated.
Teh added, “Dialog had shown its ability to deliver earnings, which is consistent and sustainable where its net profit has grown at 36 per cent CAGR over the FY05 to FY11 period, owing to its ‘hospital concept’ business model as well as secured earnings from TUA.
“EPCC jobs are sustained by in-house contracts from the CTF segment. As a result, Dialog is making two sources of income streams from the CTF projects – one from EPCC jobs and the other from operating the CTFs.”
Dialog had always been trading at higher valuation compared with other local O&G service providers due to its CTF business. As this is a concession-base asset, investors were willing to pay at a premium for its secured earnings streams.
In the past 10 years, Dialog traded at 17.1 times to its earnings on average while it had traded at 20.5 times on average, since the announcement of Pengerang CTF in June 2010.
“At the current price of RM2.42 per share, we believe its forward calendar year 2012 (CY12) 21.7 times price earnings ratio is fair as the full earnings potential from Balai RSC and Pengerang CTF will start to kick-off from 2015 onwards.
“We have projected gross dividend per share to be four sen to six sen over the period of FY12 to FY14, based on its dividend policy of 40 per cent earnings payout.
“We view positively over its first ever fund raising which it expects to raise at least RM448 million from a two for 10 rights issue offer at RM1.60 which comes with one free detachable warrant (exercise price of RM2.20).
“We expect its net cash position to increase to RM723.3 million in FY12 from RM168.4 million in FY11, due largely to the subscription of 394.5 million rights issue shares,” Teh revealed.
As such, he derived Dialog’s target price of RM3.19 per share, assuming a fully-subscribed rights issue of the new shares from its current issued shares of 1,971.5 million with no conversion of warrants and no earnings contributions from the Jubail Supply Base.