DIALOG GROUP BERHAD (DIALOG)

Transcription

1 DIALOG GROUP BERHAD (DIALOG) 9/2/214 Financial Year: Jun-213 Latest Quarter: 3/9/213 Price: 3.3 Stock Category: Large Capital Growing Board: Main Board FBMKLCI: NO Industry: TRADING SERVICES Sub-Sector: OIL AND GAS-ENGINEERING; Ownership: - Corporate Owned (Local) PROCUREMENT AND SVC L. C. Chong is NOT an investment advisor nor a financial advisor, and no information provided here is to be interpreted as a suggestion to buy or sell securities. All figures in thousands of Ringgit Malaysia except per share values and ratios Click here to understand definition of some financial terms Prepared by: L. C. Chong Website: L. C. Chong Page 1 of 6

2 DIALOG GROUP BERHAD FY Latest Rolling 4 Quarter Results Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Turnover Net Profit EPS Revenue and Earnings 2,5 2, 1,5 1, 5 Revenue EBIT Net Income Balance Sheet 3, 2,5 2, 1,5 1, 5 Total Assets Total Liabilities Total Equity Cash Flow PER SHARE VALUE (CENTS) % 1 5.% CROIC Gross Profit Margin Valuation FCF/Sales Debt Coverage (FCF) DCF 3-Y 5-Y 1-Y Good 15% Base 11% Bad 7% Ugly 3% EY% Valuation R4Q-EPS FY14-EPS FY15-EPS Buy Under Sell Above ROIC Net Profit Margin Cash Conversion Cycle Debt/Equity 1 (1) Absolute P/E R4Q-EPS FY14-EPS FY15-EPS Fair Value Buy Under Operating Owner Earnings

3 Financial Highlights Performance of FY213 - Topline growth. Dialog's full year revenue expanded a massive +36.9%yoy to RM2.2b, compared with RM1.6b in FY12. The higher revenue was mainly attributable to the increasing engineering, procurement, construction and commissioning (EPCC) works at the Pengerang Deepwater Terminal in Johor. To date, Dialog has completed around 65% of the works and has set up 4 tanks on site. In addition, growth in revenue is supported by the increase in fabrication activities from the specialist products and services division. - Margin contraction. FY13 blended net margin contracted -2.2pp to 8.6% due to cost overruns experienced earlier in the financial year by plant maintenance projects undertaken in Singapore. This was caused by delays and setbacks experienced by Dialog Plant Services Pte Ltd while working on live-plants in Singapore. However, DIALOG would still stand a chance to recoup losses via variation orders to be undertaken. Losses are estimated to be around RM3m. - Revenue and net profit increased consistently. - CROIC and ROIC dropped in and 213. I think it was mainly caused by increasing liabilities, especially in borrowings. Their main spending is on "Development of tank terminals" and "Land deposits for development of tank terminals". - DIALOG is able to maintain NPM and FCF/Sales close to my benchmark, but both are not inconsistent. This is due to high CAPEX in expanding the business. - Cost of sales and services spiked up a lot from 1,441,67 () to 2,16,217 (213). I couldn't find the reason of this in the annual report. - DIALOG uses high leverage in expanding their business. They probably have sufficient free cash flow and assets to cover their debts. - They also maintained low Cash Conversion Cycle. - From to, Net Operating Cash Flow and Owner Earnings have been increasing steadily. Reason of cash flow dropped in 211 and is the investment in building tank terminals Performance as at Topline growth. Dialog's 1Q14 revenue expanded a massive +38%yoy to RM575.5b. However, PATAMI failed to keep pace with revenue growth, accounting for only 2% and 19% of ours and consensus full year's earnings forecasts. - Margin contraction. 1Q14 blended net margin contracted -2.9pp to 8.3%, due to pressure from increased operating expenses. Geographic segment-wise, pretax margins from Malaysia eroded quite substantially from a year earlier. Local pretax margin from fell -5.9pp to 17%. Pretax margins from Singapore also fell by -1pp from a year earlier to 3.7%. - DIALOG's registered a profit before tax of RM64.2 million against RM66.7 million in the preceding quarter. This was mainly due to lower contribution from Specialist Products & Services in particular for sales registered in Malaysia, Middle East and Australia for the current quarter. - Company bullish on future prospects. Despite eroding margins, the group is bullish on prospects in Pengerang as it is currently reaping earnings from EPCC works. After the construction phase, the group will then be able to reap recurring income from oil storage (targeted to be online in 1HCY14 and subsequently, LNG storage services. - Upstream investments. In addition, the group indicated that it will continue to invest in upstream activities and to enhance its capabilities in order to increase its involvement in the development of marginal fields and the rejuvenation and redevelopment of mature oil fields. BC Petroleum Sdn Bhd, a 32%-owned JCE has commenced a programme of Extended Well Testing on the Balai-2 well. Economic Moats Economic Moats: Narrow Cost Advantage

4 Not available or no moat found Switching Costs - One of the main contractors in Malaysia oil field Network Effect Not available or no moat found Intangible Assets Not available or no moat found Efficient Scale - One of the main contractors in Malaysia oil field Growth Drivers & Risks/Challenges Growth Drivers

5 - The entire Pengerang tank terminal for the 5-acre development includes a RM5bil oil storage facility (5 mil m3 capacity) and a RM4bil liquefied natural gas (LNG) regassification and storage facility of 72, m3. Hence, an expansion of the site acreage could result in higher gross development value for the project. - Petronas' final investment decision on the USD2bil Refinery and Petrochemical Integrated Development project, which will lead to the launch of Pengerang Independent Deepwater Terminal Phase 2. - The Pengerang Phase 1, which will have 1.3mil cu metre of tank storage capacity, is expected to have its first oil commissioning in 2Q214. We understand that the storage capacity can be scaled up by 54% to 2mil m3 if Dialog secures other off-takers for the additional capacity. - Endeavours on the upstream marginal and mature fields front - Bloomberg reported that Petroliam Nasional (Petronas) has announced that the Balai oil field has commenced production, the second marginal field to do so since the Petrofac-SapuraKencana operated Berantai RSC, which started gas production since October. Recall that Dialog has a 32% stake in the Balai marginal field risk sharing contract (RSC), together with the operator Roc Oil (48%) and Petronas Carigali (2%). - Took up a 5% equity in Halliburton Bayan Petroleum Sdn Bhd (HBP) from Asia Energy Services Sdn Bhd - Construction works for Phase 1 of Pengerang CTF is ongoing with tentative completion by 1QCY14. Around 8% of customers have been secured under medium- to long-term contracts (3-5 years), mitigating concerns on capacity not being taken up. Phase 2 has yet to start despite reclamation works being almost done. Its commencement will depend on the outcome of the Final Investment Decision (FID) for Petronas RAPID project (which completion is reportedly delayed to late-217/early-218). - The completion of the DIALOG Jubail Supply Base (DJSB) in Saudi Arabia - This integrated offshore logistics hub which supports flourishing offshore oil and gas activities in the Arabian Gulf, serves to reinforce DIALOG s position as a reputable integrated offshore supply base service provider in the region. - Five-year project awards from PETRONAS Carigali Sdn Bhd (PCSB), Sarawak Shell Berhad/Sabah Shell Petroleum Company Limited and Kebabangan Petroleum Operating Company. Meanwhile, Carigali Hess Operating Company Sdn Bhd and Talisman Malaysia Limited, each awarded the Division, contracts for a period of three years. - Balai starts production - On 1 Nov, Petronas announced that oil production from the Balai field in the Balai cluster risk service contract (RSC) area had started on 6 Nov. The Balai cluster RSC was awarded in Aug 211 to BC Petroleum whose shareholders are Australia's Roc Oil (48%), Dialog (32%) and Petronas Carigali (2%). It is the second RSC that has successfully achieved oil production, the first being the Berantai gas field. h d l h f h l h b d d f h h (f l Risks/Challenges - RAPID delay to moderately slow development at Pengerang terminal project. While the delay in PETRONAS' RAPID project is minor setback to Dialog's capacity expansion programmes for its "dedicated terminals" in Pengerang, it will continue to pursue growth should demand and opportunity for "independent tank terminals" arise. - Delays in its in-house EPCC jobs and new projects - New capex intensive projects which continue to be a drain on cashflows. Lower cash position will also yield lower interest income

6 Strategy My View: - Fair values: - EY%: (I take average of EPS estimation for FY14 and FY15 from 11 analysts) - Absolute PE: (I take average of EPS estimation for FY14 and FY15 from 11 analysts) - Based on the current price (3.3 as of 7 Feb 214), DIALOG is either overvalued or fully valued. - I will consider to buy DIALOG if it drops below 3., or may be at 3. (if 3. turns out as a support). Portfolio Strategy: Lump Sum + Top Up Averaging Down Method: - Dollar Cost/Value Averaging Portfolio Execution: - Buy and Monitor BUY1;BUY2;BUY3;BUY4;BUY5;B Buying Basis: EPS QoQ Growth > 15% Price is below Intrinsic Value (DCF) Price is below Intrinsic Value (EY%) Price is below Intrinsic Value (Absolute PE) Price is below Intrinsic Value (DY%) Stock price breaks out of consolidation/dip on an uptrend. Company owner/directors, and major fund institutions heavily buying SELL6;SELL7;SELL8;SELL9;SELL1;SELL11;SELL12;SELL14 Selling Basis: Quarterly EPS drop for 3 consecutive months. Price has risen too far from its intrinsic value (DCF) Price has risen too far from its intrinsic value (EY%) Price has risen too far from its intrinsic value (Absolute PE) Price has risen too far from its intrinsic value (DY%) Long term trend changed from bullish to bearish Company owner/directors, and major fund institutions heavily selling Fundamental of business turns unattractive or bad (bear cases) The current price is 3% away from my average holding price. Other good reasons stated in MorningStar's article. L. C. Chong Page 6 of 6