Dialog Group Bhd The Malaysian tank king: great upside with low risk

Transcription

1 Oil & Gas - Equipment & Svs Malaysia October 16, 2017 Shariah Compliant Company Note Alpha series Malaysia ADD (previously NOT RATED) Consensus ratings*: Buy 9 Hold 6 Sell 0 Current price: RM2.16 Target price: RM3.07 Previous target: N/A Up/downside: 42.1% CIMB / Consensus: 38.1% Reuters: Bloomberg: Market cap: Average daily turnover: DIAL.KL DLG MK US$2,885m RM12,179m US$5.40m RM22.98m Current shares o/s: 5,266m Free float: 60.0% *Source: Bloomberg Key changes in this note N.A. Source: Bloomberg Price performance 1M 3M 12M Absolute (%) Relative (%) Major shareholders % held Tan Sri Dr Ngau Boon Keat 21.3 EPF 12.7 ERRATA: This is a revised version of the original report that was issued on 16 Oct In this revised version, we have reflected Dialog s 25% equity stake in the Pengerang SPV2 and SPV3 tank terminals; the original version of the report inadvertently included the full contribution. As a result, our FY18F, FY19F and FY20F core net profit forecasts have been reduced from RM453m, RM800m, and RM1,047m, respectively, to RM341m, RM437m, and RM515m. Our Add recommendation, SOP valuation and target price of RM3.07 are intact. Analyst(s) Raymond YAP, CFA T (60) E raymond.yap@cimb.com Dialog Group Bhd The Malaysian tank king: great upside with low risk We initiate Dialog with an Add call and a SOP-based target price of RM3.07, as the company has strong earnings growth prospects, coupled with low business risk. Dialog is at the cusp of substantial earnings growth, as the to-be-expanded Phase 1, and Phase 2 of the Pengerang tank farm, will be commissioned from CY19F onwards. Continued development at Pengerang will take Dialog forward for the next 15 years, underwriting its EPCC arm, and its plant maintenance and catalyst handling services. Downside risks include slower-than-expected planting of new tank terminal capacity. Traditional business is asset light Dialog was founded in 1984 by Tan Sri Dr Ngau Boon Keat, who remains as its executive chairman. It started out as the marketing agent for several specialist products that are supplied to the oil and gas industry, while also performing plant maintenance and catalyst handling services. Dialog also has workshops to fabricate various modules for the downstream sector, and an EPCC business that helps to set up petrochemical plants and tank terminals. These traditional businesses continue to be active today. but Dialog is growing its presence in the tank terminals business From 1997 onwards, Dialog entered the tank terminals business when it was awarded a 20-year contract for the Kertih tank terminal, followed by an investment in the Langsat terminals in Dialog s big break came when the Johor state government approved its application in 2010 to develop the Pengerang Deepwater Terminal (PDT) in southern Johor. This led to the signing of the JV agreement to develop Phase 1 of the PDT in 2011, followed by two more JV agreements in 2014 to develop Phase 2. Strong growth outlook due to Petronas s presence at Pengerang Dialog s success in securing the land lease for PDT in 2010 after negotiating for three years, is a critical event that set it up for future financial success, in our view. We think Dialog s second coup d état happened when Petronas made the decision to build an oil refinery and steam cracker at the RAPID complex in Pengerang, followed by Petronas Chemicals plan to build three petrochemical plants in the same area. This downstream industrial hub is a natural source of significant tank storage demand. Dialog can more than double its tank terminal capacity, in our view The undeveloped parts of PDT represent a major growth opportunity for Dialog. Over the next years, it is targeting to more than double its equity share of tank terminal capacity, by securing new long-term off-takers for new phases of its PDT development. We think this is even more likely to be achieved given Petronas s presence at Pengerang. Singapore s Jurong Island, a synergistic oil refining, petrochemical and tank storage hub, shows what can be achieved when downstream industrial players invest in the area. PDT has significant advantages over Jurong Island terminals With the backing of Malaysia s national oil company, we believe the PDT is poised to grab tank terminal market share from the regional incumbent, Singapore, directly benefitting Dialog. The PDT is being developed with the latest technological know-how, and will have deep and uncongested berths, and comprehensive pipeline connectivity. By comparison, Jurong Island s terminals were built without intra-island pipeline connectivity, which results in significant berth congestion, leading to inefficiencies and higher costs. Spillover benefits to Dialog s traditional businesses As new PDT developments take shape, we believe Dialog s EPCC business will benefit from the in-house tank terminal construction work, keeping it busy for the next years. The up-and-coming oil refinery and petrochemical plants at Pengerang can also build demand for Dialog s plant maintenance and catalyst handling services, in our view. Financial Summary Jun-16A Jun-17A Jun-18F Jun-19F Jun-20F Revenue (RMm) 2,534 3,393 3,402 3,450 3,458 Operating EBITDA (RMm) Net Profit (RMm) Core EPS (RM) Core EPS Growth 3.1% 26.2% (0.5%) 28.2% 17.8% FD Core P/E (x) DPS (RM) Dividend Yield 1.02% 1.23% 1.15% 1.47% 1.72% EV/EBITDA (x) P/FCFE (x) NA NA Net Gearing (2.8%) (0.1%) 66.5% 63.0% 47.2% P/BV (x) ROE 11.3% 11.8% 10.6% 12.6% 13.6% % Change In Core EPS Estimates CIMB/consensus EPS (x) SOURCE: COMPANY DATA, CIMB FORECASTS IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. Powered by the EFA Platform

2 The Malaysian tank king: great upside with low risk EXECUTIVE SUMMARY Short profile Dialog is a leading integrated technical services provider to the upstream, midstream and downstream sectors in the oil, gas and petrochemical industry. It was established in 1984 and over the years, Dialog has grown both organically and through strategic alliances with international technology partners. Headquartered in Kuala Lumpur, Dialog has a presence in nine countries, i.e. Malaysia, Singapore, Thailand, Indonesia, China, Australia, New Zealand, Saudi Arabia and United Arab Emirates. Dialog has a staff strength of over 2,200, and has exposure to the following segments in the oil and gas value chain. 1. Midstream Provision of tank terminal services in Malaysia, particularly in Kertih, Tanjung Langsat, and Pengerang. Operates a supply base to facilitate offshore oil and gas activities in Jubail, Saudi Arabia. 2. Upstream Equity partner in the Oil Service Contract (OSC) for the Bayan field, offshore Sarawak. Equity partner in the Production Sharing Contract (PSC) for three marginal fields offshore Sarawak (D35, D21, and J4 fields). Dialog was also an equity partner in the Risk Service Contract (RSC) for the Balai Cluster field, offshore Sarawak, but this contract was terminated by Petronas in February Downstream Acts as a marketing representative for various technology partners for the sale of specialist products used in the oil and gas industry. Provision of refinery and petrochemical plant maintenance and catalyst handling services. Fabrication of process modules, process skids, heat exchanges, and other structures for the use of the oil and gas industry. Provision of Engineering, Procurement, Construction and Commissioning (EPCC) services for the construction of plants in the oil and gas or petrochemicals industry, and also for the construction of tank terminals and jetties. Initiate with an Add rating, target price of RM3.07 We initiate coverage of Dialog with an Add recommendation, and an SOPbased target price of RM3.07. The company not only has strong earnings prospects, in our view, but it also adopts a low-risk business philosophy, and we believe its seamless execution in the past has demonstrated the depth and quality of its management team. 2

3 Excellent earnings growth prospects across all businesses Over the next three forecast years (FY18-20F), we expect Dialog s core net profit to rise by 58% cumulatively, as its major Pengerang Deepwater Terminal (PDT) Phase 2 projects are progressively commissioned. In addition, Dialog will increase its effective stake in the Langsat terminals from the existing 44% to 80% by end-october 2017F, thus enabling more of the profits to be included in the consolidated accounts. The contributions from Phases 1 and 2 of the PDT development are accounted for as JVs and associates, which explains why we forecast substantial increases in Dialog s share of profits from its JVs and associates in FY18-20F. Dialog s traditional downstream businesses are consolidated as subsidiaries, and we expect steady earnings from these companies during this period Figure 1: Dialog's annual core net profit/(loss) (RM m) - actual and our estimates 600 Core net profit - subsidiaries (RM m) Core net profit - JVs & associates (RM m) FY2015 FY2016 FY2017 FY2018F FY2019F FY2020F SOURCES: CIMB, COMPANY REPORTS Once fully built-up, the existing Phase 1 and Phase 2 PDT developments will have 4.4m cubic metres (cbm) of oil storage capacity, and we believe the available land area at PDT will be sufficient to accommodate a further 10.6m cbm of tankage capacity, for a total capacity of around 15m cbm. This means that there is plenty of growth potential left at PDT from which Dialog can extract value, in our view. As such, we expect Dialog s EPCC arm to likely be busy with all the in-house tank terminal EPCC jobs for the next years. We think Dialog will also likely see a greater volume of plant maintenance and catalyst handling service contracts being offered to the market, once Petronas s oil refinery and Petronas Chemicals (PCHEM MK, HOLD, TP: RM7.50) three petrochemical plants are commissioned from 2019F onwards. We also believe that the prospects for the sale of specialist products like base drilling oil will improve, now that Petronas has dramatically increased production and development drilling in Malaysia from mid-2017 onwards (relative to the lows seen in ), and the global and Southeast Asian utilisation of jack-up drilling rigs are creeping up. Finally, Dialog has exposure to the fluctuation in oil and gas prices, by virtue of its upstream involvement in the PSC and OSC businesses. Higher energy prices will feed through directly to improvements in the profitability of these businesses. 3

4 Low-risk business philosophy Dialog runs its business with an eye for low-risk growth. All of its tank terminals are based on a JV structure, where key partners are roped in to share the capex risk, provide technical and operating expertise, and to ensure their commitment to continued use of the terminals. Dialog s in-house expertise in EPCC work also ensures that construction risks during the tank terminal building stage are reduced as much as possible, in our view. For future Pengerang phases, Dialog is not looking to build any more independent terminals, but rather will look for dedicated off-takers who will be willing to lease the tanks for very long durations. Dialog s low-risk philosophy extends to its borrowings. The currency of its borrowings mirror the underlying revenue currencies of the various entities. Dialog also enters into interest rate derivatives to swap floating for fixed rates. In conclusion, we believe Dialog has been executing its business growth with an eagle s focus on the control of construction, capex, operating, and financial risks. As such, for the purposes of our DCF valuation exercise, we are adopting a very low beta of 0.6, which we believe is justified based on Dialog s low risk profile and strong growth prospects. We have discounted the cash flow-toequity forecasts of the tank terminal business using a real cost of equity of 4.5%, or a nominal cost of equity of 7.6%, assuming a 3% inflation rate. SOP valuation of RM2.22 based on the existing portfolio of activity, RM3.07 including the potential from Pengerang s long-term expansion Our end-cy18f SOP valuation for Dialog is based on a combination of DCF, book value, and P/E multiples for its various businesses. For the tank terminals business, we believe the DCF methodology is best suited for its valuation, due to stability of earnings and well-defined contractual periods. In aggregate, the existing tank terminal business is worth RM1.59/share, based on our calculations. Dialog still has plenty of land left for future development at Pengerang, which we believe is worth at least RM0.85/share, also based on DCF of projects that we have forecast to be built here. We have valued Dialog s upstream assets at only RM0.03/share, using net book value for each of the upstream companies based on the latestavailable financial statements (30 June 2016 for PSC and 31 December 2015 for RSC and OSC). We believe this valuation is conservative, as discussed later in this report. For Dialog s traditional businesses, i.e. EPCC, sale of specialist products, plant maintenance, catalyst handling and fabrication businesses, we apply a 15x P/E multiple to sustainable earnings of RM200m p.a., which contributes RM0.53/share to our Dialog target price. The remaining value of RM0.07/share can be attributed to the sum of the value of the advances from Dialog Group Berhad to JV and associates, its consolidated cash balance and other net assets of the group, less consolidated net debt (all as of end-cy18f). We have valued other net assets based on book value. 4

5 Figure 2: SOP valuation of Dialog Group Berhad (RM m) end-cy18f Cash flow forecast period Valuation Dialog's of 100% equity stake equity stake Attributable to Dialog Per share value Valuation method From To RM m % RM m RM/share Tank Terminals (RM m) 27, , A - Kertih Terminals FY00 FY60F 1, B - Langsat Terminals (B1 + B2) FY10 FY67F 1, , C - Pengerang Terminals (C1 + C2) FY14 FY76F 23, , A Kertih Terminals - Until end of 60-year land lease FY00 FY60F 1, Kertih Terminals Sdn Bhd (30% JV) - until FY30F FY00 FY30F 1, % DCF to equity Kertih Terminals Sdn Bhd (30% JV) - FY31F-FY40F FY31F FY40F % DCF to equity Kertih Terminals Sdn Bhd (30% JV) - FY41F-FY60F FY41F FY60F % DCF to equity B1 Langsat Terminals - Until end of current 30-year land FY10 FY37F 1, lease Langsat Terminal (One) Sdn Bhd (44% JV, to become 80%) FY10 FY37F % DCF to equity Langsat Terminal (Two) Sdn Bhd (44% JV, to become 80%) FY12 FY37F % DCF to equity B2 Langsat Terminals - Assuming 30-year extension of FY37F FY67F land lease Langsat Terminal (One) Sdn Bhd (44% JV, to become 80%) FY37F FY67F % DCF to equity Langsat Terminal (Two) Sdn Bhd (44% JV, to become 80%) FY37F FY67F % DCF to equity C1 Pengerang Terminals - Until end of current 65-year FY14 FY76F 21, , land lease SPV1 - Pengerang Independent Terminals S/B (46% JV) FY14 FY76F 2, % 1, DCF to equity SPV2 - Pengerang Terminals (Two) S/B (25% JV) FY19F FY76F 10, % 2, DCF to equity SPV3 - Pengerang LNG (Two) S/B (25% assoc) FY18F FY76F 7, % 1, DCF to equity C2 Pengerang Expansion - Certain and high probability 2, , SPV1 - Extra 1m cbm, FY20F onwards (46% JV) FY20F FY76F 2, % 1, DCF to equity Upstream (RM m) PSC - Dialog Resources S/B (100% sub, 20% interest in PSC) % NBV 30 Jun 2016 RSC - BC Petroleum S/B (32% JV) % NBV 31 Dec 2015 OSC - Halliburton Bayan Petroleum S/B (50% JV) % NBV 31 Dec 2015 Downstream (RM m) 3, % 3, x P/E on sustainable earnings of RM200m p.a. Note: Including EPCC, Specialist Products & Services, Plant Maintenance & Catalyst Handling Services, Fabrication, and Overseas businesses under Dialog Systems (Asia) Pte Ltd. Add: Advances from Dialog Group Bhd to JVs and associates at end-cy18f (RM m) Add: Other net assets 2, Add: Dialog Group Bhd's consolidated cash balance at end-cy18f (RM m) Less: Dialog Group Bhd's consolidated debt balance at end-cy18f (RM m) -2, Total SOP valuation of Dialog Group Berhad (RM m) - end-cy18f 12, Pengerang Long-Term Expansion FY24F FY76F 19, , SPV5 - Similar to SPV2, FY24F onwards (25% JV) FY24F FY76F 6, , DCF to equity SPV6 - Similar to SPV2, FY29F onwards (25% JV) FY29F FY76F 5, , DCF to equity SPV7 - Similar to SPV2, FY34F onwards (25% JV) FY34F FY76F 4, , DCF to equity SPV8 - Similar to SPV2, FY39F onwards (25% JV) FY39F FY76F 3, DCF to equity Total SOP valuation, including long-term Pengerang expansion (RM m) - end-cy18f 17, Number of ordinary shares (m) 5,641.6 NOTE: LAND LEASE COMMENCEMENT DATES AND TANK TERMINAL COMMERCIAL COMMENCEMENT DATES MAY BE DIFFERENT SOURCES: CIMB FORECASTS, COMPANY REPORTS 5

6 BACKGROUND Short profile Dialog is a leading integrated technical services provider to the upstream, midstream and downstream sectors in the oil, gas and petrochemical industry. It was established in 1984 and over the years, Dialog has grown both organically and through strategic alliances with international technology partners. Dialog is headquartered in Kuala Lumpur, but has a presence in nine countries, i.e. Malaysia, Singapore, Thailand, Indonesia, China, Australia, New Zealand, Saudi Arabia and United Arab Emirates. Dialog readily serves a diverse range of customers that include multinational oil majors, national oil companies, as well as multinational engineering and services providers located throughout the world. Dialog has a staff strength of over 2,200, and has exposure to the following segments in the oil and gas value chain. 1. Midstream Provision of tank terminal services in Malaysia, particularly in Kertih, Tanjung Langsat, and Pengerang. Operates a supply base to facilitate offshore oil and gas activities in Jubail, Saudi Arabia. 2. Upstream Equity partner in the Oil Service Contract (OSC) for the Bayan field, offshore Sarawak. Equity partner in the Production Sharing Contract (PSC) for three marginal fields offshore Sarawak (D35, D21, and J4 fields). Dialog was also an equity partner in the Risk Service Contract (RSC) for the Balai Cluster field, offshore Sarawak, but this contract was terminated by Petronas in February Downstream Acts as a marketing representative for various technology partners for the sale of specialist products used in the oil and gas industry. Provision of refinery and petrochemical plant maintenance and catalyst handling services. Fabrication of process modules, process skids, heat exchanges, and other structures for the use of the oil and gas industry. Provision of Engineering, Procurement, Construction and Commissioning (EPCC) services for the construction of plants in the oil and gas or petrochemicals industry, and also for the construction of tank terminals and jetties. Diversification of the business model Dialog s original business model was based on asset-light oil and gas services, particularly acting as a reselling agent for various specialist products, and providing plant maintenance and catalyst handling services. It also currently has ten fabrication yards and workshop facilities. From 1997 onwards, Dialog began a process of business diversification, making initial moves into the tank terminals business, and then the upstream business. In 1997, Dialog made an equity investment in its maiden tank terminal at Kertih, which commenced operations in In 2007, the concession to operate the Tanjung Langsat tank terminal was awarded (operations commenced 2009), while the joint venture for the first phase of the Pengerang terminal was concluded in 2011 (operations commenced 2014). 6

7 In 2011, Dialog entered into the upstream segment by taking an equity stake in the RSC, followed by entry into the OSC in 2012, and finally the PSC in Listing history and major shareholders Dialog was listed on the Second Board of the KLSE in 1996 (initial market cap of RM55m at IPO), transferred to the Main Board in 2000, and has generated annualised total returns of 31% since its listing from 1996 until 2016, according to Dialog s 2016 annual report. Currently, major shareholders include Executive Chairman Tan Sri Dr Ngau Boon Keat, with a total direct and indirect interest of 21.3%, followed by EPF at 12.7%. We estimate that PNB has more than 6% interest, split over several of its unit trust funds. We believe KWAP probably has slightly below a 5% interest, as from 28 July 2017, it ceased to be a substantial shareholder. Other institutional shareholders include Lembaga Tabung Haji, Public Mutual, and Singapore s GIC, with 2-4% interests each. Directors and management team The outstanding highlight of the Dialog board of directors and management team, in our view, is their length of service at the company, and their depth of experience. Key executive directors of Dialog include: Tan Sri Dr Ngau Boon Keat, Executive Chairman. Aged 69, he is the cofounder and major shareholder of Dialog. He holds a Bachelor Degree (Hons.) in Mechanical Engineering and an Honorary Doctorate in Engineering from the University of Canterbury, New Zealand. He began his career in 1972 as a Refinery Engineer with Mobil Singapore Pte Ltd. He worked at Petronas from 1975 to 1980 where he held various positions from Production Engineer to Engineering Manager. He has more than 44 years of working experience in both upstream and downstream of the oil, gas and petrochemical industry. Mr Chan Yew Kai, Executive Deputy Chairman. Aged 63, he holds a first class Honours Degree in Chemical Engineering from the University of Malaya. He joined Dialog in 1993 as General Manager and was later promoted as Director and Chief Executive Officer of Dialog Systems (Asia) Pte Ltd, overseeing the operations of the group s business development, marketing, technical services and petroleum retail. He was later appointed as Deputy Group Managing Director and President & Chief Operating Officer of Dialog prior to his current position. He has over 38 years of experience in the oil, gas and petrochemical industry encompassing plant operations, project engineering and management, marketing and business development. He was formerly with ICI for nine years and Petronas for five years. Mr Chew Eng Kar, Director, Corporate Services. Aged 58, he holds a professional qualification with the Association of Chartered Certified Accountants, United Kingdom and is also a Chartered Accountant with the Malaysian Institute of Accountants. He has been with Dialog since 1992, where he joined as the Group Finance Manager and was later promoted to General Manager, Group Finance before his appointment to the Board. He has more than 32 years of working experience in corporate and financial management. Madam Zainab binti Mohd Salleh, Director, Group CFO and Joint Company Secretary. Aged 51, she holds a Bachelor of Commerce in Accountancy from University of New South Wales, Australia and is a Chartered Accountant with the Malaysian Institute of Accountants. She joined Dialog in 1995 as Accountant and was later promoted to Group Chief Financial Officer and Joint Company Secretary. Other non-executive directors include Datuk Oh Chong Peng, aged 73, independent director, Madam Kamariyah binti Hamdan, aged 66, independent director, Mr Ja afar bin Rihan, aged 49, non-independent director, and Madam Siti Khairon binti Shariff, aged 63, independent director. 7

8 Key senior management include: Mr Mustaffa Kamal bin Abu Bakar, Chief Operating Officer. Aged 53, he has been with the group since He was appointed as Chief Operating Officer on 10 October He holds a Bachelor of Science Degree in Mechanical Engineering from the Nevada-Reno University, USA. He joined the group in 2001 as Director, Business Development (Plant Services Division) and was made the Chief Executive Officer of Dialog E & C Sdn Bhd and Dialog Plant Services Sdn Bhd. He was subsequently promoted as Group Managing Director for the Malaysia Business Operations on 1 November He has more than 29 years of working experience in the oil, gas and petrochemical industry. He was formerly with Petronas Carigali Sdn Bhd for five years and with other oil and gas related companies in design, consultancy, construction and fabrication, and maintenance and specialised services. Mr Chong Chong Wooi, Executive Director, Major Projects. Aged 59, he joined Dialog in He was appointed Executive Director, Major Projects in January He is responsible for the development of Pengerang project which involves reclamation, dredging, jetty and storage tanks construction. He has over 33 years of working experience in engineering, construction and project management in the oil, gas and petrochemical industry. Dato Capt. Abdul Rahim bin Abd Aziz, Head of Pengerang Marine Operations Sdn Bhd. Aged 63, he joined Dialog in 2012 as the Chief Executive Officer/General Manager of Pengerang Marine Operations Sdn Bhd, and was re-designated as the Head of PMOSB, his current position in June Mr Tan Lip Leong, Head of Engineering and Construction, and Fabrication. Aged 54, he has actively participated in the engineering and construction of oil refineries, gas processing plants, ethylene/polyethylene plants, butanol plant and LNG plant facilities. Mr Mohamed Khalzani bin Mohamed Saffian, Head of Group Logistics. Aged 51, his role in Dialog is to find new joint venture partners and tank terminal off-takers, for the further development of the Pengerang Deepwater Terminal. He also sits as a board member in joint venture companies within Dialog group. Mr Andy Soo Seng Onn, aged 49, is the Head of Upstream Services, Acting Head of Upstream Ventures. Mr Heng Soon Lip, aged 54, is the Head of Plant Services. He leads and oversees the business development and operations of plant maintenance and catalyst handling services. Other key management include Mr Ng Chong Wah (Director of Corporate Planning), Madam Jessie Ku (Head of Group Human Resources), Mr Jeffrey Gerard Perera (Managing Director of epetrol group of companies), Madam Evelyn Ho Kam Yong (Head of Digital Technology). Madam Jenny Chok, (Head of Group Legal), Mr Shahruddin Ahmad (Head of Government Relations), Mr Mike Newman (Director of Petroleum Engineering, Upstream), Mr George Bell (Director of Engineering, Upstream), Mr Abdul Rashid Mohd Yusoff (Senior Manager of Finance, Upstream), Mr Shahimi Zakaria (Director of Plant Maintenance and Fabrication), Mr Loke Wei Yuan (Acting Head of Fabrication), Mr John Henry Thornton (Director of Operations Excellence, Downstream), Mr Tan Lek Lek (Executive Director of Technical Services), Mr Loy Ah Wei (Director of Special Function for the Singapore Operations), Mr Richard Ellis (Managing Director of Fitzroy Engineering, New Zealand), Mr Yoshiyuki Hiraoka (Managing Director of the OTEC group), Mr Andrew Lai (Executive Director of Pacific Advance Composites Sdn Bhd), Mr Steven Teow Yee (Country Manager for Singapore), Mr Tan Ngee Meng (Country Manager for Saudi Arabia), Mr Vijayasekharan N (Country Manager for UAE), Mr Chong Chee Ken (Country Manager for Indonesia), Mr Andy Copland (General Manager of Dialog Services Pty Ltd, Australia), Mr Tirin Tongpatanakul (Country Manager for Dialog Systems (Thailand) Ltd), and Mr Fang Min (Country Manager for China). 8

9 Figure 3: Dialog's key business units and companies (at present) Midstream Description Langsat Tank Terminals Facilities Langsat Terminal (One) Sdn Bhd (44% JV) Langsat Terminal (Two) Sdn Bhd (44% JV) Owner and operator of Tanjung Langsat tank terminals. Owner and operator of Tanjung Langsat tank terminals. Kertih Centralised Tankage Facilities Kertih Terminals Sdn Bhd (30% JV) Owner and operator of the Kertih tank terminals. Pengerang Deepwater Terminals SPV1 - Pengerang Independent Terminals Sdn Bhd (46% JV) SPV2 - Pengerang Terminals (Two) Sdn Bhd (25% JV) SPV3 - Pengerang LNG (Two) Sdn Bhd (25% associate) Owner and operator of Phase 1 of the Pengerang Deepwater Terminal's tank terminal facilities. Owner and operator of Phase 2 of PDT's tank terminal facilities. Owner and operator of Phase 2 of PDT's LNG regasifacation plant. Jubail Offshore Supply Base Dialog Jubail Supply Base Company Ltd (60% subsidiary) Provision of offshore base support for Arabian Gulf offshore oil and gas fields. Upstream Description Production Sharing Contract (PSC) - for the D35, D21, and J4 fields 20% interest, via Dialog Resources Sdn Bhd (100% subsidiary) 20% participating interest in a mature PSC block offshore Sarawak, i.e. the D35, D21, and J4 fields. Oilfield Service Contract (OSC) Bayan Mature Field Halliburton Bayan Petroleum Sdn Bhd (50% JV) Holder of the OSC to increase production from the Bayan mature field, offshore Sarawak. Risk Service Contract (RSC) Balai Cluster BC Petroleum Sdn Bhd (32% JV) Holder of the RSC for the Balai Cluster fields offshore Sarawak. The RSC contract was terminated by Petronas on 3 Feb Upstream Support Services Dialog Energy Sdn Bhd (100% subsidiary) Dialog Subsurface Technology Sdn Bhd (100% subsidiary) Provision of upstream support services. Provision of seismic technology and other related upstream services. SOURCE: CIMB RESEARCH, COMPANY 9

10 Figure 4: Dialog's key business units and companies (continued) Downstream Description Engineering, Procurement, Construction & Commissioning Dialog E & C Sdn Bhd (100% subsidiary) Dialog Offshore Engineering Sdn Bhd (55% subsidiary) Dialog Engineering Pte Ltd (89% subsidiary) * Dialog Systems (Thailand) Ltd (49% subsidiary) * Provision of EPCC services, included EPCC for terminal facilities in Kertih, Tanjung Langsat, and Phase 1 of Pengerang Deepwater Terminals. Provision of Front-End Engineering Design services. Contracting of petroleum and petrochemical-related works in Singapore. Contracting of petroleum and petrochemical-related works in Thailand. Specialist Products & Services Dialog Systems Sdn Bhd (100% subsidiary) Dialog E & I Sdn Bhd (100% subsidiary) PT Dialog Sistemindo (90% subsidiary) * Dialog Services Pty Ltd (100% subsidiary) * Plant Maintenance & Catalyst Handling Services Dialog Plant Services Sdn Bhd (100% subsidiary) Dialog Catalyst Services Sdn Bhd (71% subsidiary) Dialog Plant Services Pte Ltd (80% subsidiary) * Dialog Services Pte Ltd (100% subsidiary) * Marketing of speciality chemicals, catalysts and absorbents, petroleum additives, drilling base oil, etc. Provision of specialised electrical, instrumentation, and calibration services. Marketing of speciality chemicals, equipment and technical support services in Indonesia. Marketing of speciality chemicals and equipment, provision of catalyst and process material handling services in Australia. Provision of plant turnaround and specialist maintenance work. Provision of plant maintenance work in Singapore. Provision of catalyst and process material handling services. Provision of catalyst and process material handling services in Singapore. Fabrication Dialog Fabricators Sdn Bhd (100% subsidiary) Saga Dialog Sdn Bhd (100% subsidiary) Fitzroy Engineering Group Limited (88% subsidiary) * Dialog OTEC Pte Ltd (80% subsidiary) * Fabrication of steel structures, process skids, pressure vessels, etc. Construction of tankage pipings, equipment installation, hook-up and commissioning. Provision of heavy fabrication and engineering in New Zealand. Fabrication of steel storage tanks and strutures in Singapore and Malaysia. Petroleum retailing Dialog Petroleum Sdn Bhd (100% subsidiary) Retailing of petroleum. epayment Technology & Solutions epetrol Services Sdn Bhd (60% subsidiary) Development of front-end payment solutions, terminals, infrastructure and systems. * held under Singapore-incorporated Dialog Systems (Asia) Pte Ltd SOURCE: CIMB RESEARCH, COMPANY 10

11 Figure 5: Dialog's tank terminals in Malaysia (at present) DIALOG S TANK TERMINAL BUSINESS Key terminals in Kertih, Langsat and Pengerang The key assets in Dialog s tank terminals business are as follows: 1. Kertih Terminals Sdn Bhd 30% JV, 2. Langsat Tank Terminals Facility (LTTF) 44% JV (split into Langsat Terminal One and Langsat Terminal Two), 3. Pengerang Independent Terminals Sdn Bhd ( SPV 1 ) 45.9% JV, 4. Pengerang Terminals (Two) Sdn Bhd ( SPV 2 ) 25% JV, and 5. Pengerang LNG (Two) Sdn Bhd 25% associate. Name of tank terminal Independent tank terminals Langsat Terminal One Location Capacity (cbm) Langsat Terminal Two 171,000 Pengerang Independent Terminal ('SPV1') Southeast coast of Johor Southeast coast of Johor 476,000 1,300,000 Types of storage tanks Owners Notes 32 tanks for petroleum products 10 tanks for petroleum products 57 tanks for crude oil and petroleum products Langsat Terminal (One) Sdn Bhd (Dialog 80%, Trafigura 20%) Langsat Terminal (Two) Sdn Bhd (Dialog 80%, Trafigura 20%) Pengerang Independent Terminals Sdn Bhd (Dialog 46%, Vopak 44%, Johor State 10%) Phase 1 commissioned Sep 2009 Phase 2 commissioned Apr 2010 Phase 3 commissioned Aug liquid berths with draft of 13-15m. Langsat Port failed to dredge to 16.5m, as agreed with the tank terminal owners. Commissioned Dec 2011 Commissioned from Apr 2014 to Mar berths of 24m draft. Pengerang Independent Terminal expansion part 1 Pengerang Independent Terminal expansion part 2 Subtotal independent tank terminals Southeast coast of Johor 430, ,000 2,947, tanks for clean petroleum products Crude oil and petroleum products Pengerang Independent To be commissioned progressively from 1Q19F; Adding Terminals Sdn Bhd 1 berth of 24m draft for a total of 6 berths. (Dialog 46%, Vopal 44%, Johor State 10%) Almost certain to be constructed by 2020F. Industrial tank terminals Kertih Terengganu 400,000 Pengerang Deepwater Terminal Phase 2 ('SPV2') Pengerang Deepwater Terminal Phase 2; Pengerang LNG ('SPV3') Subtotal industrial tank terminals Southeast coast of Johor Southeast coast of Johor 2,100, ,000 2,900, tanks for the storage of petrochemical products 66 tanks for crude oil, petroleum products, and petrochemicals 2 tanks for the storage of LNG, 200,000 cbm each Kertih Terminals Sdn Bhd (Petronas Chemicals 40%, Dialog 30%, Vopak 30%) Pengerang Terminals (Two) Sdn Bhd (Petronas 40%, Dialog 25%, Vopak 25%, Johor State 10%) Pengerang LNG (Two) Sdn Bhd (Petronas Gas 65%, Dialog 25%, Johor State 10%) Leased to six companies linked to Petronas Chemicals Commissioned from 2000, contracted for 20 years to Expected to be commissioned between 1QCY19F and 3QCY19F. 12 berths of 24m draft. Dedicated for the use of Petronas RAPID refinery and Petronas Chemicals petrochemical plants. Expected to be commissioned by end-cy17f. SPV3 hosts an LNG regasification plant with an initial send-out capacity of 3.5m mtpa, as well as two LNG storage tanks totalling 400,000 cbm. Future developments Pengerang Deepwater Terminal (PDT) Langsat Terminal 3 Subtotal future developments Southeast coast of Johor Southeast coast of Johor 10,600, ,000 Petroleum products 10,980,000 Crude oil and petroleum products Exact ownership structure is dependent on the anchor tenants, but Dialog is expected to have a minority stake. Langsat Terminal (Three) Sdn Bhd (Dialog 80%, Trafigura 20%) The entire PDT development is able to accommodate a total of 5 jetties, each sufficient to accommodate movements for 3m cbm of storage, or 15m cbm in total. Dialog is planning to focus on the industrial model for the remaining undeveloped capacity at PDT. On 6 Oct 2011, Centralised Terminals Sdn Bhd entered into a shareholders agreement with China Aviation Oil (Singapore) Corporation Ltd to develop a 380,000 cbm oil storage tank terminal facility. The agreement lapsed on 20 Aug 2012, and this project did not take off. Grand Total 16,827,000 SOURCE: CIMB RESEARCH, COMPANY REPORTS, PLATTS 11

12 Independent vs. dedicated terminals The Langsat and Pengerang SPV1 terminals are considered independent terminals, as they are common user facilities and not built for a specific user in mind. Having said that, the Langsat terminal is effectively being used only by Trafigura, since other oil traders would prefer not to use that facility given that it is partially owned by a competitor. Kertih, Pengerang SPV2 and Pengerang SPV3 are dedicated, industrial terminals that are not open to other third-party users. A lot more room to grow Currently operational are the Kertih Centralised Tankage Facilities (KCTF), with a storage capacity of 400,000 cbm, the Langsat Tank Terminals Facility (LTTF) of 647,000 cbm, and Pengerang SPV1 of 1.3m cbm. Pengerang SPV2 is currently under construction, and we expect the initial capacity to be commissioned between 1QCY19F and 3QCY19F. When fully constructed, SPV2 should have 2.1m cbm in storage capacity. Pengerang SPV3 is also currently under construction, and we expect it to be commissioned by end-cy17f. SPV3 will house an LNG regasification plant with 400,000 cbm of LNG storage tanks. Pengerang SPV1 will be expanded by an additional 1m cbm, with the first 430,000 cbm of that expansion recently announced and expected by the company to be commissioned by 2019F. We expect the remaining 570,000 cbm of capacity expansion to be commissioned by 2020F. We believe all of the above suggest that Dialog is on track to have 5.8m cbm of tank storage capacity by 2022F. Figure 6: Dialog may be able to more than double its equity share of tank terminal capacity once all potential expansion is in place (based on our estimates) FY13 FY14 FY15 FY16 FY17 FY18F FY19F FY20F FY21F FY22F Full develop ment Total nominal storage capacity (000 cbm) 1,047 1,479 2,347 2,347 2,347 2,547 3,912 5,427 5,742 5,847 16,827 - Kertih Langsat ,027 * Langsat * Langsat * Langsat SPV ,300 1,300 1,300 1,300 1,730 2,300 2,300 2,300 2,300 * SPV1 original ,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 * SPV1 expansion 430 1,000 1,000 1,000 1,000 - SPV ,680 1,995 2,100 2,100 - SPV Future Pengerang phases 10,600 Dialog's equity share of capacity (000 cbm) ,003 1,003 1,003 1,208 1,717 2,216 2,294 2,321 4,971 - Kertih (30%) Langsat (44% until Oct 2017F, 80% after) * Langsat 1 (44% until Oct 2017F, 80% after) * Langsat 2 (44% until Oct 2017F, 80% after) * Langsat 3 (assume 80%) SPV1 (46%) ,058 1,058 1,058 1,058 * SPV1 original (46%) * SPV1 expansion (46%) SPV2 (25%) SPV3 (25%) Future Pengerang phases (assume 25%) 2,650 SOURCE: CIMB RESEARCH, COMPANY 12

13 Figure 7: We believe Dialog has a lot of growth left for its tank terminal business 18,000 16,000 Dialog's equity share of capacity (000 cbm) Total nominal storage capacity (000 cbm) 14,000 12, % 10,000 8,000 6,000 4,000 2, % FY13 FY14 FY15 FY16 FY17 FY18F FY19F FY20F FY21F FY22F Full development SOURCE: CIMB FORECASTS, COMPANY In addition, Dialog has enough land to expand its Pengerang Deepwater Terminal (PDT) facilities by more than 10m cbm, in our estimate, over the next years. We believe there is a possibility that Dialog may also revive the Langsat Terminal 3 project, which was originally intended to house 380,000 cbm of tankage capacity. If all the projects take off, we think Dialog may see an almost tripling of its current and to-be-completed tank terminal nominal capacity, from 5.8m cbm to 16.8m cbm. Dialog s equity share of tankage capacity will more than double, from 2.3m cbm to 5m cbm, in such a scenario. Development phases at Pengerang At the Pengerang Deepwater Terminal (PDT), Dialog has so far embarked on the development of two phases. Phase 1 involved the development of a piece of land under Pengerang Independent Terminals Sdn Bhd (PITSB), also called SPV1. First completed in 2014, SPV1 is currently undergoing an expansion programme. Phase 2 involves the ongoing development of two parcels of land. The first parcel is under Pengerang Terminals (Two) Sdn Bhd (PT2SB), also known as SPV2, and is dedicated to Petronas s Refinery and Petrochemical Integrated Development (RAPID) refinery. We expect it to be commissioned in 2019F. The second parcel is under Pengerang LNG (Two) Sdn Bhd (PL2SB), also known as SPV3, and houses a regasification terminal and two tanks for the storage of 400,000 cbm of LNG in total. We expect this to be commissioned by end-2017f. The land lease from the Johor state government for Phases 1 and 2 is for 65 years from 2011 to 2076F, with an option to renew for an additional 34 years, i.e. for a maximum lease period of 99 years to 2110F. 13

14 Core competitive advantages of the PDT development A. Size and unified ownership At an expanded capacity of 2.3m cbm, SPV1 will be the one of the singlelargest independent tank terminals in the Singapore Straits, second only to Universal Terminal s 2.33m cbm on Jurong Island. In third place, is the Tankstore terminal on Busing Island with capacity of 2m cbm. Apart from these three terminals which each have a capacity of 2m cbm or higher, there are: Six independent terminals in the Straits with capacity of between 1m and 1.5m cbm (five in Singapore and one in Malaysia), Four terminals with capacity of between 0.5m cbm and 1m cbm (two existing in Singapore, one in Malaysia, one in Indonesia), and Three terminals with capacity of less than 0.5m cbm (two existing in Singapore, and one upcoming in Singapore). From the data above, it is clear that there are very few independent terminals in the Singapore Straits that have the size of the to-be-expanded SPV1. Size does matter, as it can provide the lessees the ability to consolidate all their tankage requirements in one location. Many tank terminal lessees on Jurong Island currently store their oil in several different tank farms across the island, which adds commercial complexity, since the ownership of the Jurong Island tank farms are distributed across several different owners, requiring separate commercial negotiations with multiple tank terminal operators, and also requiring multiple leasing contracts to be signed. With SPV1 being one of the largest tank terminals in the Singapore Straits, oil traders can consolidate their tankage requirements in one location and thus reduce management time spent on contractual negotiations, in our view. B. Pipeline connectivity The entire Pengerang Deepwater Terminal (PDT) was built with the latest tank farm technology to ensure efficient operations, which also means that the entire PDT is linked via pipeline. In contrast, many of the tank farms on Jurong Island are not linked via pipeline, meaning that oil traders lifting oil products need to berth at various different terminals across Jurong Island just to fill up one tanker vessel. By comparison, tankers berthing at any one berth at PDT will have pipeline access to all the tanks at PDT. Using multiple terminals at Jurong Island also reduces the efficiency of operations, since many of Jurong Island s tank terminals are older, and have different owners, and hence, are not linked by pipeline to each other. This means that an oil trader seeking to load its cargoes need to physically sail its shipping tanker vessel all over the island and engage in several berthing/unberthing operations, just to fill up one particular vessel. Quite often, oil traders do not buy their cargoes from one tank terminal only, but purchase in smaller individual parcels that are sourced from different tank terminals. This physical movement from one tank terminal to another is time consuming and inefficient for the oil traders, not to mention that it will be more costly since ships have to pay berthing and pilotage fees each time the ships berth. Often, oil traders even have to pay demurrage to the vessel owners, due to congestion at the Jurong Island berths. Conversely, at PDT, the entire location is controlled and operated by Dialog as the common shareholder, with Koninklijke Vopak (VPK NA, Not Rated) as the technical partner (and also shareholder). This results in unified and coordinated terminal operations, where Phase 1, Phase 2, and the future Phase 3 and beyond, will all be linked via pipeline. This means that oil traders that are loading or unloading their cargoes can berth in one specific location and can have access to all the tanks at the entire PDT area, regardless of the Phase in which those tanks are located. This can also facilitate exchange of products between oil traders, for instance, selling one product offloaded from the tanker and buying another product to be piped in from one of the onshore PDT tanks. These are tremendous efficiency gains for the oil traders, in our view. In 14

15 addition, the operating costs in Malaysia are lower than in Singapore. This is critical for oil traders, since margins from trading are typically thin, any savings on logistics costs are likely to go straight to the oil traders bottom line. C. Deep berths One added benefit of the PDT is that its berths can accommodate fully-laden Very Large Crude Carriers (VLCCs) as the berths have a draft of 24m. Not that many berths at Jurong Island have the ability to do that. In some cases, newlybuilt VLCCs on their maiden journey that were loaded with refined and clean petroleum products have berthed at PDT, which is uncommon, as 300,000 dwt VLCCs are typically used to carry crude oil, while the largest product tankers are typically of the LR2 size, with cargo capacity of 105,000 dwt to 115,000 dwt each. The ability of the PDT to accommodate fully-laden VLCCs therefore opens up the opportunity for oil traders to reduce unit shipping costs, with the savings likely to go directly to their bottom line. D. Petronas participation The establishment of the Petronas s RAPID crude oil refinery as well as Petronas Chemicals three petrochemical plants increases the economic viability of Dialog s PDT facility, in our view. First, the oil refineries and petrochemical plants contribute to sustainable industrial demand for the tank terminals at the PDT, over and above the demand from Pengerang s status as a trading and distribution hub in the Straits region. The industrial demand from Petronas is underwriting Dialog s SPV2 terminals, whereas the trading and distribution functions of PDT are what underwrite the demand for SPV1 s terminals. Second, oil traders storing oil at PDT will also have access to the output of Petronas s RAPID refinery and Petronas Chemicals petrochemical plants. These Petronas facilities add significant value to PDT, in the same way that the oil refineries and petrochemical plants on Jurong Island add value, volume and depth to the throughput of tank terminals on Jurong Island. Third, the presence of Petronas s RAPID crude oil refinery as well as Petronas Chemicals three petrochemical plants also helps build an ecosystem in the Pengerang area. Eventually, we believe other petrochemical plants or crude oil refineries will also be encouraged to set up in Pengerang, and there will emerge a synergistic industrial park built around the refining and petrochemical industries, where various companies can share common facilities and infrastructure, and can buy and sell feedstocks and products literally over the fence. The industrial park concept is why Singapore s Jurong Island has been so successful, and will likely continue to be successful, in our view. However, given land constraints in Singapore s Jurong Island, and the difficulties in providing for more tank storage facilities, Pengerang can play a complementary role for the provision of storage facilities. Over time, we are confident that Petronas and Petronas Chemicals initial move into Pengerang will attract more international refinery and petrochemical investments into Pengerang, which we believe will then benefit Dialog by way of growing the demand for tank storage facilities. E. Dialog s expertise in tank terminal EPCC development Dialog is the only tank terminal owner/operator in Southeast Asia that has an integrated team that can design and engineer tank terminals, procure the materials to construct the terminals, as well as construct and commission them once completed. We believe this significantly improves the cost-efficiency of setting up the tank terminals, as Dialog does not take more than 5-10% profit margin on its EPCC works, and is more advantageous than using third-party design engineers or construction firms as these companies typically charge healthy rates and margins upfront. 15

16 Short history In 1997, Dialog made an equity investment in its maiden tank terminal at Kertih, which commenced operations in This was intended to serve Petronas Chemicals petrochemical facilities at Kertih, and as one of the first dedicated, industrial tank terminals in Malaysia, Dialog negotiated a very attractive return for the 20-year lease. With Kertih in its pocket, Dialog then explored the possibility of expanding its tank terminal business at potential sites in Kuantan, Penang, and Johor (Tanjung Pelepas), however these did not materialise. Dialog finally expanded this business from 2007 onwards at Tanjung Langsat. The idea for a new deepwater terminal came about during a 2007 golf game between Tan Sri Dr Ngau Boon Keat (Executive Chairman) and his Shell business partners at Sentosa Island, Singapore, according to Dialog. Shell had noted that a deepwater port in Malaysia would be the ideal location for a tank farm, as Singapore s Jurong Island was increasingly congested. Dialog also realised that Tanjung Langsat had its limitations given the shallow water draft. With that idea that was first planted in 2007, Dialog searched different locations in Malaysia for a suitable site, and eventually found Pengerang to be ideal. It took two years before Dialog signed a Memorandum of Understanding with the Johor state government in 2009 to explore the feasibility of developing the site and to perform environmental impact assessment studies. Tan Sri Dato' Haji Abdul Ghani bin Othman was the Chief Minister of the Johor state at that time. To convince the state government of the viability of its plans, Dialog hosted the Johor state officials to a site visit in Rotterdam to give them a sense of what Johor can achieve. Malaysia s Performance Management and Delivery Unit (Pemandu), which was formed in 2009, played a major role in helping Dialog secure the approvals from multiple government ministries to kickstart the project, according to Dialog. Finally, in 2010, the Johor state government awarded the 65-year land concession to Dialog to develop Pengerang. The actual physical EPCC work was awarded to Dialog E & C Sdn Bhd in June 2011, and construction work commenced in 3QCY11. Completion of Phase 1A was achieved in At the time Dialog began the Pengerang development, Petronas had not even decided on the location of their new refinery project, and Pengerang was not under consideration at that point. Dialog s entry into Pengerang and the development of supporting infrastructure, like tank terminals and deepwater jetties, had helped convince Petronas that Pengerang was the best location for its planned new refinery. On 3 April 2014, Petronas made a final investment decision (FID) to invest in the Pengerang Integrated Complex (PIC) in Southern Johor, Malaysia, which includes the Refinery and Petrochemical Integrated Development (RAPID) refinery with a capacity to process 300,000 bopd of crude oil, as well as the steam cracker plant that is capable of producing 3m tonnes p.a. of petrochemicals. Meanwhile, Petronas Chemicals also made the decision to invest in three new chemical plants within the RAPID complex. The development of the RAPID complex promises to add significant value to Dialog s Pengerang Deepwater Terminal (PDT), in our view, as 1) the refinery and petrochemical plants will constitute a natural source of demand for tank storage facilities, 2) it will encourage oil traders to be based at Pengerang, and 3) it will also encourage other petrochemical and chemical plants to establish new facilities in Pengerang as they can use the feedstock produced by the refinery and cracker plants. 16

17 Joint-venture partnerships are important to Dialog Partnerships are an important feature in Dialog s tank terminals business. Dialog had entered into equity JVs with Koninklijke Vopak (Vopak, a 400-year old Dutch company with a specialised interest in the global tank terminals business), with MISC (MISC MK, REDUCE, TP: RM6.33) (a local Malaysian company with an interest in owning the tank terminals business), with Trafigura (as global oil trader and terminal user), with Petronas, Petronas Chemicals, and Petronas Gas (PTG MK, HOLD, TP: RM19.90) (as terminal users), and finally with the Johor state government (as landowner). These JVs are important to Dialog, in our view, as they spread out the capex risk and concentration risk in the business, and because Dialog does not want to overstretch its balance sheet as it continues to build new infrastructure and revenue streams in these relatively capex-intensive businesses. In addition, as the world s largest operator of independent tank terminals, we believe Vopak can contribute specialist know-how in the business, and help Dialog build new tank terminals that are equipped with the latest technological advances. Dialog s EPCC arm benefits from tank terminal construction As Dialog enters into the tank terminals and storage business, it also works to ensure that its in-house EPCC arm benefits from the construction of these terminals. Project management is done in-house on a negotiated alliancing basis, which means that Dialog sets up a single project management team with key staff drawn from technical partners such as Vopak and Petronas. We believe this supports maximum efficiency, minimum miscommunication, and a significantly lower risk of cost overrun. IRRs are enhanced, with a lower initial capex cost but a higher rate of recurring return over the long term. Dialog s primary business philosophy is to generate sustainable, recurring income, and it is not interested in earning large, once-off construction fees from EPCC work. Still, EPCC work can generate profit margins of 5-10%, and Dialog generally reinvests the profits from the EPCC work to partially or wholly fund its equity investments into the tank terminal JVs. Revenue, operating costs and profit margins Most of the revenues from the tank terminal business come from the base tank rental fees. In addition, the terminals can earn throughput fees, which depend on the quantity of movements into and out of the tankage facilities, and fees from other miscellaneous services such as blending and heating. Throughput fees and misc. service fees generally go straight to the bottom line, since the base tank rental fees already cover the capital costs and fixed operating costs. The revenue currency for the Kertih and Langsat terminals are denominated in Malaysian ringgit. SPV1 s revenue currency is in S$, given that it is an independent terminal operating in competition with terminals in Singapore, where the rates are also denominated in S$. SPV2 and SPV3 s revenue currencies will be denominated in US$, which is the functional currency of its customers, Petronas and Petronas Chemicals. EBITDA margins for the tank terminal business are generally about 80-90%, since operating costs mainly consist of utilities, labour and insurance. The physical tanks can typically last years, as long as there is consistent maintenance to control corrosion or replace steel parts that have been corroded. Pumps may need to be replaced more frequently. All of this is accounted for as maintenance capex, which is typically about 2-3% of annual revenue. Dialog is obligated contractually to maintain the tank terminals and ensure their smooth running. Dialog is required to meet certain operating metrics for uptime etc., failing which, Dialog will have to pay certain penalties to the users of the tank terminals. 17

18 Project financing Typically, project financing is obtained for between 70% and 80% of the project capex. The tenures of the bank borrowings generally range for 7-10 years, or up to 12 years maximum. Kertih s borrowings were fully repaid by 2004, merely four years after it began operations, and one year ahead of the official tenure, and the business has been debt free since then. Langsat 1 s project financing debt has a tenure of 12 years and will be fully repaid by FY22F. Langsat 2 s project financing will be fully repaid by FY21F, which is 10 years after it commenced operations. SPV1 s borrowings have a tenure of 12 years. For the SPV2 and SPV3 terminals, as well as the SPV1 expansion project, we have assumed 10-year debt tenures. Dialog s tank terminal JVs generally try to reduce their borrowing risks to a minimum, by matching the revenue currencies to the debt currencies, and also by using interest rate derivatives to swap floating into fixed rates. Langsat s debts are denominated in Malaysian ringgit, which is also its revenue currency. SPV1 s debts are financed by Singaporean banks in S$, as a natural hedge against its S$ revenue streams. SPV2 s loans are in US$, as its revenue currency is also in US$. In addition, Dialog had swapped 82% of SPV1 s project financing debt into fixed interest rates, in order to minimise risks from rising global interest rates, and we expect similar swaps for the SPV2 and SPV3 borrowings. Project IRR targets For its tank terminal investments, Dialog targets a project IRR of 9-10% over the contract term, net of taxes. For dedicated facilities such as SPV2 and SPV3, which have been contracted on a take-or-pay basis to specific clients, Dialog hopes to achieve the hurdle rate over the firm contract period of 25 years, according to management. For SPV1, the company s target IRR is based on the first 20 years, although the project IRR cannot be reliably estimated in advance because the utilisation and storage rates are market driven. Based on our calculations, SPV1 will not be able to achieve the desired IRR target based on 1.3m cbm, but the target will be achieved after expanding the terminal to 2.3m cbm. Since Kertih was the first tank terminal, we project Dialog to achieve an IRR of 14% over the 20-year firm contract period to 2020F. Business risks We believe the business risks for Pengerang SPV2 and SPV3 are lower than that for SPV1 because of: The strong counterparties (i.e. Petronas group of companies) at SPV2 and SPV3. The guaranteed take-up of the facilities at SPV2 and SPV3 given that they are dedicated facilities. The very long 25-year duration of the leasing agreement at SPV2 and SPV3, whereas SPV1 leases are for 2-4 years duration typically. The terms of the leases are renegotiated at the end of the contract periods. Because of the low business risks of the dedicated facilities, the leasing rates offered to customers with strong credit ratings like Petronas will likely be more attractive than that for smaller customers, subject to Dialog achieving its minimum required project IRR. Due to Dialog s low-risk business management philosophy, it is keen to adopt the dedicated model for the upcoming Phase 3 of the Pengerang Deepwater Terminal (PDT) development. Hence, Dialog is on the lookout for long-term offtakers that have plans to build new refinery or petrochemical plants at Pengerang. 18

19 In the event that certain customers are unable to pay their rental hire, Dialog can pursue recovery via seizing the oil in their tanks and selling it to realise cash. We are not worried about the competition Dialog s Kertih, Pengerang SPV2 and SPV3 facilities are dedicated to Petronas Chemicals, Petronas, and Petronas Gas, respectively. Hence, they are not subject to direct competition. On the other hand, Dialog s Langsat terminals and Pengerang SPV1 are common-user, independent terminals and are subject to competition with other terminals in the Singapore Straits region. Singapore s Jurong Island is the industry incumbent, but with rising operating costs and berth congestion, we expect it to lose market share to the tank terminals in Malaysia. VTTI s (Unlisted) Tanjung Bin tank terminal is not direct competition, in our view, because the terminal is used almost entirely by its parent company, global oil trader, Vitol (Unlisted). Other oil traders shy away from Tanjung Bin in order to protect their trading strategies from their competitor. Oiltanking s (Unlisted) Karimun terminal in Indonesia is purported to be substantially leased by oil trader, Gunvor Group (Unlisted). We do not expect competition from Karimun to be significant, due to specific country risks related to Indonesia. The Asia Petroleum Hub (APH) project in Malaysia has been revived, but we do not see this as a threat to Dialog s tank terminals in Tanjung Langsat and Pengerang, as we believe the APH is likely to focus on being a bunkering hub. In the future, we view Malaysia s Tanjung Piai Maritime Industrial Park (TPMIP) as being a bigger potential threat to Dialog s Langsat terminals. However, we believe that Dialog s Pengerang SPV1 terminal will be protected by its proximity and pipeline linkages to the RAPID oil refinery and petrochemical hub. For detailed information on the competitive landscape, please refer to the appendices. 19

20 Comparisons between Dialog s portfolio of tank terminals Figure 8: Comparison between Dialog s portfolio of tank terminals Average revenue per cbm of capacity Annual revenue Capacity Average annual rev per cbm of capacity RM m m cbm RM/cbm Kertih (CY15) Langsat 1 (FY6/16) Langsat 2 (FY6/16) Pengerang SPV1 (FY6/16) Unit capex calculations, excluding land improvement, land reclamation, and land lease costs Unit capex per Capex Capacity cbm of capacity RM m m cbm RM/cbm Kertih ,538 Langsat ,061 Langsat Pengerang SPV1 2, ,538 Pengerang SPV2 6, ,000 Unit capex calculations, all costs included Capex Capacity Unit capex per cbm of capacity RM m m cbm RM/cbm Kertih ,575 Langsat ,187 Langsat Pengerang SPV1 2, ,923 Pengerang SPV2 7, ,667 NOTE: BASED ON LATEST AVAILABLE FIGURES SOURCE: CIMB RESEARCH, COMPANY Average annual revenue per cbm of capacity Using historical financial statements, we compare the revenues of each operating tank terminal against its official maximum capacity. Based on this metric, we notice that Kertih s average revenue per cbm of capacity of RM506/cbm was much higher than for Langsat 1 and 2 of RM160/cbm, and also against Pengerang SPV1 s RM178/cbm. This is because the Kertih Centralised Tankage Facilities (KCTF) is a dedicated and specialised tank terminal catering for the chemical industry, which requires higher specifications than simple crude/clean storage tanks at Langsat and SPV1. As a result, the tank terminal at KCTF was also more expensive to build, and more expensive to maintain than the crude/product tank terminals at Langsat. The average revenue per cbm of capacity of the Langsat terminals was comparable to that of Pengerang SPV1, which is within expectations, since both terminals are mainly for the storage of petroleum products. 20

21 Unit capex calculations As noted earlier, Kertih was more expensive to construct (RM1,575/cbm) than the Langsat terminals. Langsat 1 had cost RM1,187/cbm to build, which was more than Langsat 2 s RM877/cbm, probably because Langsat 1 was the first to be planted, and Langsat 2 may be riding on the shared infrastructure first constructed at Langsat 1, in our view. However, at RM1,923/cbm, Pengerang SPV1 s crude oil and petroleum product tanks appear to be have been even more expensive to construct than Kertih. We believe there are two reasons for this. 1. SPV1 is built on reclaimed land, while Kertih was built on the mainland without the need for reclamation costs. Excluding land improvement, land reclamation and land lease costs, SPV1 had cost RM1,538/cbm to construct, (based on our calculations) which is on par with Kertih. 2. Only 1.3cbm of capacity has been planted on SPV1 to-date, whereas capex had already been spent at the beginning for a whole host of shared facilities, like the trestles and berths, and the pipeline infrastructure, for up to 2.3m cbm of capacity. We believe that the capex cost for SPV1 (excluding land improvement, land reclamation and land lease costs) for the entire 2.3m cbm of fully built-up capacity would be approximately RM3bn, implying that unit capex costs will fall to an even lower RM1,304/cbm. As we expected, this would be lower than Kertih s RM1,538/cbm. However, even at RM1,304/cbm, the capex cost at SPV1 (excluding land improvement, land reclamation and land lease costs) would be more expensive than for the Langsat terminals. We believe this may be because SPV1 was built with the latest technological advances with input from Vopak. Pengerang SPV2 is currently still being constructed, but it is on track to be more expensive to build on a per cbm basis than SPV1. There are two reasons for this, in our view: 1. SPV2 is a dedicated industrial terminal for Petronas s use, and was built according to Petronas s specifications. It is also an integral part of the RAPID refinery, and is interlinked via pipeline with that refinery. On the other hand, SPV1 is a common terminal with specifications that are interchangeable across different customers, with pipeline movements restricted to between tanks, and between the tanks and the jetty. 2. SPV2 has storage tanks for petrochemical products (in addition to storage tanks for crude oil and refined products), which are more expensive to build than the crude oil and refined product tanks. SPV1 only has storage tanks for crude oil and refined products, and no tanks for the storage of petrochemicals. 21

22 UPSTREAM Dialog has three major ventures in the upstream oil and gas space, two of which continue to be active today. In 2011, Dialog entered into the upstream segment by taking an equity stake in the Balai Cluster Risk Service Contract (RSC), followed by its entry into the Bayan field Oil Services Contract (OSC) in 2012, and finally by making an investment in the D35, D21 and J4 Production Sharing Contract (PSC) in Effective 1 December 2015, Petronas terminated the RSC, and Dialog has since closed the chapter on this venture. However, Dialog still has exposure to the PSC and OSC contracts. With the prevailing low oil prices, the upstream segment s contribution to Dialog s bottomline is immaterial. We believe Dialog is on the lookout for viable and mature upstream production assets, which may become available for possible acquisition. However, the opportunities appear to be limited, in our view, and we are unclear as to whether Dialog will succeed in finding additional viable investments. Production Sharing Contract (PSC) On 5 September 2014, Dialog agreed to take a 20% stake in the D35, D21 and J4 PSC from Roc Oil (Unlisted), thereby reducing Roc Oil s participating interest from 50% to 30%. Currently, the equity partners in the D35, D21 and J4 PSC are Petronas Carigali Sdn Bhd (40%), Roc Oil Malaysia (Holdings) Sdn Bhd (30%), Dialog Resources Sdn Bhd (20%) and E&P Malaysia Ventures Sdn Bhd (10%). E&P Malaysia Ventures is a wholly-owned subsidiary of Petronas Carigali, while Dialog Resources is a wholly-owned subsidiary of Dialog. The entire PSC is operated by Petronas Carigali, and the term of the PSC expires on 31 December 2034F. Under Malaysia s PSC mechanism, the stakeholders combine their capital to develop the field and to perform exploration and production drilling activities. During the production stage, PSC contractors take a share of the oil and gas production to compensate for their opex and capex spending, and also to earn profits. Hence, the contractors are exposed to the risk of fluctuating oil and gas prices. The value of the oil and gas produced in excess of government royalties, opex recovery, capex recovery, production tax, and petroleum income tax, is booked as profits. Field development landscape The D35 field is located 91km offshore Sarawak. The field was discovered in 1983 and production started in 1994 in water depths of 45m. Development is via fixed platforms, with an export pipeline linking the D35 field to the Bayan field 50km away. From there, oil goes to the Bintulu terminal and gas to the Malaysian LNG plant at Bintulu. Production from D21 and J4 are tied into D35. The D21 field is located 97km offshore Sarawak. The field was discovered in 1983 and production started in 2010 in water depths of 49m. Development includes the use of a wellhead platform tied into the D35DP-A platform on the D35 field via a 10" x 13 km subsea pipeline. The J4 field is located 97km offshore Sarawak. The field was discovered in 1978 and production started in 2008 in water depths of 53m. Development includes a drilling platform (DP-A) tied back to facilities on D35 via a 12" x 53 km pipeline. The D35, D21 and J4 fields combined originally had 2P oil reserves of 52 mmbbl and 2P gas reserves of 43 bcf. At the peak, the three fields produced 60,000 bpd of oil and 84 mmscfd of gas. In 2014, the fields produced a combined 10,000 bpd of oil and 17 mmscfd of gas, according to Clarksons. We are unclear as to what the most recent levels of production are. Based on the above 2014 production data, we estimate that Dialog s PSC produces 22

23 some 0.9 mmbbl per quarter, which is roughly on par with Sapura Energy s (SAPE MK, HOLD, TP: RM1.63) 0.8 mmbbl of production per quarter from its Peninsular Malaysia oil fields. Redevelopment and enhancement initiatives The field re-development and enhancement of oil recovery consist of two phases. Phase 1 commenced in early 2014 and was designed to increase the oil production rate and enhance the fields production potential through a series of intervention activities and facility debottlenecking projects. Phase 1 had a minimum work commitment of US$70m, and has already been completed. Phase 2 is expected to significantly expand the production and overall recovery potential from the fields. Phase 2 is subject to a Field Development Plan (FDP) sanction, following the completion of a series of studies designed to prove the reservoirs responses to re-pressurisation and tertiary recovery. Completion of the study work and the subsequent FDP approval process were originally planned for 2015, with potentially four new drilling platforms and a Mobile Offshore Production Unit (MOPU) to be awarded in However, the entire process was delayed due to low oil prices. During FY16, the PSC partners successfully drilled one appraisal and three infill wells, costing RM90.5m, according to Dialog s FY16 annual report. A Field Development Plan (FDP) for these fields was ultimately submitted to Petronas in June 2016 and subsequently approved for execution. With the approval, further development is being planned for 2017F and beyond. Phase 2 has an original minimum work commitment of US$50m, although we believe the cost estimates will need to be refined. Phase 2 is currently ongoing, particularly in relation to infield drilling of the oil wells at the D35 field. Oil Services Contract (OSC) On 7 November 2012, Halliburton Bayan Petroleum Sdn Bhd (HBP) entered into an Oilfield Service Contract (OSC) with Petronas Carigali to enhance the recoverable reserves at the Bayan field, offshore Sarawak, through production enhancement activities, oil development and prospect appraisal across the Bayan field, over a 24-year contract period. A baseline production volume was established under the OSC, and production above that baseline is shared between Petronas and HBP based on a certain formula. On 19 November 2012, Dialog s wholly-owned Dialog D & P Sdn Bhd subscribed for 50% equity in Halliburton Bayan Petroleum Sdn Bhd (HBP) from Asia Energy Services Sdn Bhd [Halliburton International Inc's unlisted whollyowned subsidiary). This marked Dialog s entry into the OSC for the Bayan field. Nature of the OSC The Bayan field is located 49km offshore Sarawak and is operated by Petronas Carigali, who is also the sole PSC contractor. Neither Halliburton nor Dialog has an interest in the Bayan PSC, as Petronas Carigali is the sole PSC contractor. As the OSC contractor, HBP is responsible for introducing technology and production techniques that can enhance the production from the Bayan field, and hence, HBP is paid its share of the production from the Bayan field that is above a certain pre-agreed production threshold that was set at the start of the OSC. Therefore, HBP is exposed to oil price risk. Dialog has projected an IRR for the Bayan oilfield project located in offshore Bintulu to be around the mid-teens to 20% of the capex costs of US$1.2bn, which is to be spent over the 24-year life of the project. The IRR would depend largely on how much of the oil could be recovered with the available technology over the 24-year contract period. Prior to the OSC production enhancement campaign, about 30% of the oil has already been extracted from the 30-year-old field, according to Clarksons. HBP, under the OSC contract, started earning revenue from CY15. 23

24 Field development landscape The Bayan field was discovered in 1976 and production started in 1984 in water depths of 30m. The field originally consisted of two relatively small platforms, a production/quarters platform linked by a 60m bridge to a tender assisted drilling platform (the 'Grand Large'). A remote vent platform is linked to the production platform by subsea lines. Production of the waxy crude began at around 19,000 bpd and goes to the Temana field approximately 50km away by an 18" pipeline; from there it goes to shore to the Bintulu terminal. Two more wellhead platforms (C/D) were installed in 1991 and tied into the central complex by 6" pipelines. A further platform (BYG-A) was installed to handle gas production from the field. It is unmanned at night and is controlled from the D35 complex about 50km away. Production doubled in 2015 via enhancement activities including infill drilling and well intervention. During FY16, HBP completed a barge-supported production enhancement campaign and continuous studies are being performed to identify measures to enhance production further. The latest production figure for 2016 is 4,000 bpd. Risk Service Contract (RSC) The Balai Cluster RSC was Dialog s first venture into the upstream space, and its intention was to learn from the experience with its partners on the RSC, and use that experience in future upstream ventures. The RSC was terminated by Petronas effective from 1 December 2015, and the RSC will no longer have any relevance to Dialog s future. Therefore, the main purpose of the following discussion is to complete our understanding of Dialog s recent history in the upstream oil and gas sector. Nature of the RSC Under the RSC mechanism, the partners invested in capex to extract oil from the field, with the capex guaranteed to be reimbursed by Petronas based on a predetermined IRR. The RSC partners did not take any oil price risk. Equity holders in the RSC, which was held under BC Petroleum Sdn Bhd (Unlisted), were Roc Oil (48%) which took the lead operatorship role, Dialog D & P Sdn Bhd (32%), and E&P Ventures Solutions Co. Sdn Bhd (20%). The Balai Cluster RSC was signed by BC Petroleum Sdn Bhd with Petronas on 16 August 2011 for the pre-development and development of the Balai Cluster Fields which comprise a cluster of four marginal fields: Balai, Bentara, West Acis and Spaoh. The Balai Cluster RSC was effective for a period of 15 years from The Balai Cluster was the second RSC signed by Petronas, after it had earlier signed an RSC contract for the Berantai field with SapuraKencana Petroleum Bhd (SAPE MK, HOLD, TP: RM1.63) and Petrofac Energy Developments Sdn Bhd (Unlisted) in January These marginal fields were discovered earlier, but Petronas has opted not to extract the oil as it was not economic to do so in the past. However, when oil prices exceeded US$100/bbl, Petronas began to sign contracts for the development of marginal fields on an RSC basis. History of the field development and cessation The contract s development and pre-development phases were estimated by the operators to cost US$850m to US$950m. Production from all the fields was planned to be online within 24 months from the commencement of the development programme. Development was to include the drilling of wells, installation of platforms, topsides and pipelines and the tie-in of the new facilities to the existing Petronas infrastructure. Production was to commence in the order of Balai, Spaoh, West Acis and finally Bentara, with all four expected to come onstream by 2015; however, Bentara was brought to the front of the queue. 24

25 Oil production from the Balai field in the Balai Cluster Risk Service Contract (RSC) area commenced on 6 November 2013, from the Early Production Vessel located at the Bentara field as part of the extended well testing. In 2014, BC Petroleum Sdn Bhd relinquished the Balai, Spaoh and West Acis fields back to Petronas in exchange for compensation of RM635.3m, which was reimbursement of expenditure incurred for the relinquished fields. On 22 December 2014, Petronas advised BC Petroleum Sdn Bhd to cease the usage of the Early Production Vessel at the Bentara field effective 1 January The production from the Bentara field has ceased since then. There was no production from the Balai field in 2015 since the cessation of the Early Production Vessel at the Bentara field. In early 2015, Petronas had indicated that the second phase (full development) was likely to be postponed due to low oil prices, and would resume if prices stabilised. The Balai Cluster RSC contract was terminated by Petronas on 3 February 2016, with an effective termination date of 1 December 2015, for a total settlement of RM585.6m. On 12 February 2016, Petronas reimbursed RM409.9m to BC Petroleum Sdn Bhd as partial reimbursement, with the second tranche of RM175.3m on 1 June There are no further costs or contribution from the Balai Cluster RSC. BC Petroleum Sdn Bhd will be liquidated post tax settlement. Dialog booked in a loss of approximately US$10m from the termination of the RSC. 25

26 TRADITIONAL BUSINESSES Engineering, Procurement, Construction and Commissioning (EPCC) We consider Dialog s EPCC arm one of the company s key competitive advantages as it continues to build capacity in the tank terminals business. Within Southeast Asia, Dialog is the only company with an integrated design, project management, and execution team for the construction and commissioning of tank terminals. This allows it to meet its clients needs efficiently and at a low cost. For instance, when working with clients who are considering leasing tank terminals at Pengerang, Dialog can deliver a quick tank farm design prototype very efficiently with its in-house design team, and then make subsequent revisions without having to pay for expensive external consultants. Dialog has been dedicating its internal EPCC resources to the RM5.5bn construction of Pengerang tank terminals at SPV2, and the upcoming expansion of SPV1. It will also be busy with future phases of the Pengerang tank terminals development. We believe these internal jobs will keep Dialog s EPCC arm busy for the next decade or longer. Generally, Dialog does not take on many third-party jobs. EPCC construction works for the tank terminals usually attract 5-10% net profit margin. Recently completed EPCC projects include the installation of the LNG jetty topside facilities for Pengerang SPV3, and the bullet storage tanks for Toyo- Thai Corporation Ltd (Unlisted) at Pengerang. The EPCC division also recently completed field piping erection works for MHI Corp (Unlisted) for the Sabah Ammonia/Urea Project in Sipitang (completed December 2015), and another set of field piping erection works for JGC Corp (1963 JP, Not Rated) for Petronas s LNG Train 9 Project in Bintulu (completed March 2016). In March 2016, the EPCC division was also awarded a contract for a 120,000 tpa plasticiser plant in Gebeng and Kuantan Port by Taiwan s UPC Chemicals (Unlisted), which was expected by Dialog to take 18 months to complete. This project is now close to completion. Specialist products and services Dialog is the marketing agent for several specialist products and services that are supplied to the oil and gas industry. These products include Shell MDS (Unlisted) base oil, Enventure s (Unlisted) Solid Expandable Tubular, Tendeka s (Unlisted) swellable elastometers, Lubrizol Specialty Products Inc s (LSPI, Unlisted) Liquid Power Flow Improvers, and Johnson Matthey s (JMAT LN, Not Rated) catalysts. This division was badly hit by the oil and gas downturn, especially sales in Malaysia due to the significant slowdown of Petronas s capex. However, Dialog has exposure to international sales, which mitigated the impact from the slowdown in Malaysia. FY16 remained challenging for this division as the oil and gas industry was still facing a significant decline in all drilling-related activities due to low oil prices. As a result, business was negatively affected and in particular, the sales of drilling base oil. However, the division continued to derive steady income from sales of other specialist products such as catalysts and jet pumps. More recently, Petronas s drilling capex has recovered somewhat from the lows of , and we expect the sale of drilling base oil in Malaysia to recover from FY18F onwards. Moving forward, Dialog will continue to focus on new technologies and production enhancement solutions to further contribute to the group s performance, according to management. 26

27 Figure 9: List of specialist products that Dialog offers as a marketing agent, and the list of Dialog s customers for each of these products (at present) SOURCE: DIALOG Plant maintenance and catalyst handling services Plant maintenance Dialog s Plant Maintenance Services (PMS) business is held under Dialog Plant Services Sdn Bhd, which is a wholly-owned subsidiary. The PMS business provides the following services: 1) Diagnostic inspection services, 2) Plant revamp, rejuvenation and debottlenecking, 3) Tower and tray repair and upgrade, 4) Plant turnaround and shutdown, 5) Mechanical specialist services, 6) Long-term maintenance services, and 7) Tank cleaning services. Major clients include Petronas Penapisan Melaka Sdn Bhd and Petronas Penapisan Terengganu Sdn Bhd, which are two of Petronas s oil refineries based in Malacca and Kertih, respectively. Other customers include Optimal Chemicals (M) Sdn Bhd (Unlisted), Malaysian Refining Company (Unlisted), Petronas Methanol (Labuan) Sdn Bhd, and Kertih Terminal Sdn Bhd. Most of the plant maintenance work is performed in Malaysia, although there is some work overseas as well. Under this division, Dialog can perform shutdown services, turnaround services, and catalyst handling services for oil refineries as well as petrochemical plants. Plant maintenance jobs require nine months planning time, for a project that will only take one month to execute. Plant maintenance work has higher net profit margins than the EPCC part of the business. Dialog is confident that it is one of the strongest plant maintenance companies in Malaysia in terms of execution, and once the oil refinery, steam cracker, and petrochemical plants are commissioned at RAPID, Pengerang, there will be even more jobs for Dialog s plant maintenance business. 27

28 A recent trend is that as plants become more advanced, the frequency of maintenance reduces as the parts can last longer. Partially offsetting this trend is that the value of each maintenance is increased, as Dialog performs a greater proportion of value-added services, as opposed to purely general maintenance. Catalyst handling Dialog has a Catalyst Handling Services (CHS) division, whose main purpose is to change the highly-toxic chemical catalysts at petroleum refineries. A catalyst is the spark by which the oil refining process or the petrochemical plant processes are started. Petroleum refineries perform the cracking of crude oil, which involves the breaking up of large hydrocarbon molecules into smaller and more useful bits. This is achieved by using high pressure and temperatures without a catalyst (thermal cracking), or lower temperatures and pressure in the presence of a catalyst (catalytic cracking). Dialog sells and markets the catalysts themselves, but also performs the service to change the catalysts, i.e. catalyst handling, after the catalysts lifespan is exhausted. But the catalyst is toxic, so there is a certain expertise that is needed to change the catalyst. During FY16, Dialog completed several major catalyst change-out projects in petrochemical plants for Petronas Chemicals Group, BASF PETRONAS (Unlisted) and Petron Malaysia Refining and Marketing (PETRONM MK, Not Rated). Other achievements included jobs completed for onshore and offshore international oil and gas companies in the ASEAN region, such as PT Pertamina (Unlisted) and Chevron Thailand Exploration and Production Ltd (Unlisted). The CHS division is also leveraging its strength and experience to expand maintenance services in the region. Moving forward, the PMS and CHS divisions are preparing to take on bigger roles in RAPID and Pengerang when these developments come onstream in the near future. On 22 March 2017, Dialog s wholly-owned subsidiary Dialog Services Pte Ltd acquired the remaining 60% equity interest in EC-Dialog Pte Ltd (Unlisted), taking its shareholding in the latter company up to 100%. The purchase price was S$2.2m (RM6.952m). The purpose of the acquisition, according to management, was for Dialog to have full ownership of the research and technological know-how of catalyst handling, and to consolidate Dialog s catalyst handling services presence in Malaysia and the Asia-Pacific region. Fabrication Dialog s fabrication arm is able to fabricate process skids, advanced composites fiberglass piping systems, heat exchangers, and storage tanks. It has ten fabrication yards and workshop facilities, including eight in Malaysia and Singapore (Pengerang, Singapore, Johor Bahru, Malacca, Nilai, Banting, Labohan Kertih and Gebeng Kuantan), one in Australia (Brisbane), and one in New Zealand. The spread of the fabrication yards around Malaysia is a legacy from the past, but its biggest fabrication yard is now in Pengerang in terms of land area. Most of the yards are quite small, according to Dialog, and intended to serve the downstream sector (e.g. fabrication of heat exchangers). Dialog is not typically involved in upstream fabrication jobs, which tend to involve larger-sized units. The fabrication team was busy last year with projects like Toyo-Thai Corporation Ltd s bullet tanks, PT2SB s module pipe racks and Samsung Engineering s ( KS, Reduce, TP: W8,800) LNG pipeline. Others jobs included Toyo Engineering and Construction s (Unlisted) large bored piping and Sapura Energy s Mechanical Refrigeration Unit (MRU) skids. The expansion of Dialog Fabricators Pengerang Facility (DFPF) is ongoing. Moving ahead, DFPF will be ready to accommodate the increase of future projects and services, which we expect, in Pengerang. 28

29 OTHER BUSINESSES Petroleum retailing In 1999, Dialog signed a Memorandum of Understanding with ProJET Malaysia Sdn Bhd (Unlisted) as an Authorised Branded Marketer to build, own and operate up to 20 ProJET superstations, which include petroleum retail and convenience stores. ProJET was a brand-new petrol and experience in Malaysia introduced by ConocoPhillips (COP US, Not Rated), USA. In 2007, ProJet sold the petrol retail business to Shell Malaysia (Unlisted) and the stations were since rebranded to Shell. At that time, Dialog operated four stations in Malaysia as of 2004, i.e. at Kajang, Senawang, Jalan Banting, and Jalan Ulu Kelang. Currently, only two stations are still being operated, i.e. at Kajang and Jalan Ulu Kelang. Jubail Offshore Supply Base Dialog owns 60% interest in the Jubail Offshore Supply Base, held under Dialog Jubail Supply Base Company Ltd (DJSB). This sits on 4.54 hectares of land in Saudi Arabia s Jubail Commercial Port, and is an integrated offshore supply base. The land lease agreement was signed on 26 August 2009 with Jubail Commercial Port, allowing Dialog to lease 3.45 ha of land located within the port for an initial period of 20 years, with an option to extend for a further five years, for a lease rental of 672,750 Saudi riyals p.a. (approximately RM775,815 p.a.). The DJSB has a 300m long wharf, and is located in close proximity to the offshore oil and gas fields. It serves as a one-stop, integrated offshore logistics hub and resource centre for oilfield services, equipment and supplies. It is the central staging point for the deployment of Offshore Service Vessels (OSV), crew boats and drilling rigs in the Arabian Gulf region. It will also provide facilities maintenance. Phase 1 of DJSB was developed over a period of three years at a cost of 110m Saudi riyals (RM93.5m). Phase 2 of DJSB has the potential to be developed at a later stage on an additional 28 ha of land. We are unclear as to whether the Jubail Offshore Supply Base will be expanded beyond its current location. DJSB commenced operations on 11 June 2012 after securing a long-term contract from Snamprogetti Saudi Arabia Ltd (Unlisted) worth 20m Saudi riyals (RM17m), which continues to this day. The scope of the contract includes the DJSB serving as a base to assist in the movement of project cargo to the Saudi Aramco Wasit Gas Development Hasbah Offshore Facility in Saudi Arabia. DJSB also has a recently-extended contract with Saudi Aramco (Unlisted) for the supply of base oil. During FY16, DJSB signed an MOU with Power Diesel Engineering (Unlisted) for Schedule Engine overhauling services. DJSB continues to offer a wide range of specialised services despite the challenging business environment, including the management of vessel calls and berthing, provision of bunker fuel and potable water, provision for crew change for various OSV vessels, provision of offshore facilities equipment for repair and maintenance, provision of central life raft inspection and buoy maintenance centre, and the provision of storage and assembly of imported materials and supplies. 29

30 Figure 10: The Jubail Offshore Supply Base is located in Saudi Arabia, at the Persian Gulf SOURCE: GOOGLE MAPS Figure 11: We are unclear if the Jubail Offshore Supply Base will be expanded beyond its current location Location of possible Phase 2 development SOURCE: CIMB RESEARCH, COMPANY, GOOGLE MAPS 30

31 epayment Technology and Solutions The epetrol group of companies is Dialog s IT arm. It is in the business of developing epayment technology which links oil companies and other retailers to banks, to facilitate using Malaysian identity cards as a cashless payment instrument for purchases of fuel and other retail items. According to Dialog s FY16 annual report, epetrol continues to develop and promote cutting-edge technology solutions with a focus on the Oil and Gas, Telecommunications, Retail, Healthcare, Education and Carpark Management markets. Recognising the education segment as an area of growth, the first campus cashless payment system was implemented with a leading international university. epetrol has also ventured into providing a unique cashless solution for waste recycling and management. In collaboration with the waste management concessionaire for the northern region of Peninsular Malaysia, epetrol has embarked on a pilot scheme where money earned by households from the recycling of waste material is deposited into a smartcard, which is then used to pay for purchases at retail stores. 31

32 OUTLOOK Strong earnings growth based on existing projects We think Dialog has a very strong growth outlook and earnings profile over the next years, driven primarily by its tank terminal JVs and associates. We are forecasting Dialog s subsidiaries to deliver sustainable annual core net profits of slightly more than RM200m p.a. (over the next years). We expect this to come mainly from 1. Malaysian EPCC profits of around RM70m p.a., 2. RM30m in annual profits from plant maintenance and catalyst handling services, as well as the sale of specialist products, in Malaysia and 3. annual profits of some RM100m p.a. from Dialog Systems (Asia) Pte Ltd, which houses all of Dialog s diverse overseas businesses in the same segments that Dialog has presence in Malaysia. The residual profits are expected to come from Dialog s upstream ventures. For the tank terminals business, which is housed primarily in JV or associate structures, we expect annual core net profits to jump to RM330.6m in FY20F, from just RM76.2m in FY17 (Figure 16). This is mainly due to the entry into service of the Pengerang SPV3 from end-cy17f, the phased-in expansion of SPV1 from early-cy19f, and the progressive commissioning of SPV2, also from early-cy19f. The long-term earnings prospects for the Pengerang Deepwater Terminal (PDT) are bright, in our view, since Dialog still has enormous parcels of land that are yet to be developed. We have not included into our earnings forecasts any future prospects that have not yet been announced. In the following sections, we discuss the key businesses one by one, in order to flesh out their prospects in detail. Figure 12: Dialog's annual core net profit/(loss) (RM m) - actual and our estimates 600 Core net profit - subsidiaries (RM m) Core net profit - JVs & associates (RM m) FY2015 FY2016 FY2017 FY2018F FY2019F FY2020F SOURCES: CIMB, COMPANY REPORTS 32

33 Kertih Centralised Tankage Facilities (KCTF) The KCTF has capacity of 400,000 cbm for the storage of petrochemicals and is located in the Petronas petrochemical hub in Kertih. It has six customers, mainly from the Petronas Chemicals group of companies. The tank terminal has been contracted for 20 years from 2000 to 2020F on a take-or-pay basis, whereupon the lessees guarantee a minimum 88% utilisation of the 400,000 cbm capacity and also guarantee a minimum throughput of 3.2m cbm p.a. As a result, actual fluctuations in the utilisation of the terminal, if any, do not impact the annual revenues of KCTF materially. There are two main issues with respect to KCTF which must be considered, in our view, when assessing the future of the terminal, i.e. 1) whether gas supply from the offshore gas fields will be sufficient to sustain the petrochemical industry in Kertih, and 2) how the terms of the leasing contract will change post-2020f. Will gas supply be sufficient? One key issue is whether the petrochemical hub that forms the customer base for KCTF will have enough ethane supply from the gas fields offshore Terengganu to sustain its operations, and for how long. Petronas Chemicals plants in Kertih use natural gas (ethane) as their feedstock as opposed to naphtha. According to some industry participants, the natural gas resource in offshore Terengganu may be able to last another years, although we have not verified this assertion. At minimum, we expect the gas resources to last another years, since Petronas Chemicals had signed a new 20-year ethane supply agreement with Petronas, effective from 1 October Also, on 3 November 2015, Petronas Chemicals at its 3Q15 analyst briefing mentioned that based on the available gas reserves in offshore Terengganu today, there should be enough ethane to supply its two gas crackers at Kertih for at least the next 15 years. We think it is possible that some level of exploration drilling in offshore Terengganu may be able to extend the production from the gas fields for up to 40 years. If no further gas can be found, the petrochemical plants in Kertih may explore the option of importing ethane from the US shale gas fields. The ethane may be imported on very large ethane carriers (VLEC) and pumped into the pipelines at Malacca or at Pengerang, for onward pipeline transport to Kertih. We believe Petronas Chemicals will resist the closure of the petrochemical plants at Kertih, even if domestic raw gas runs out, because the plants are already fully depreciated. How will the terms of the leasing contract change post-2020f? The contract for Kertih will end in 2020F, and the major question, in our view, is what is going to be the new rate? Here is a comparison of Kertih against Dialog s other terminals: Kertih earned RM60/mt/month in FY12/15, with a PBT margin of 68% Langsat 1 and 2 earned RM20/mt/month in FY6/16, with a PBT margin of 30-35% Pengerang SPV1 earned RM20/mt/month in FY6/16, with a PBT margin of 30% Clearly, Kertih s profitability far exceeds Dialog s other terminals. If Kertih s rates halve to RM30/mt/month, it will still be able to deliver a PBT margin of 38%, which is closer to what the Langsat and SPV1 terminals are currently delivering. However, we believe Dialog is confident that it has a very strong bargaining position to ensure that the new rates will not be too much lower than the current prevailing rates. This is because there are no other tank terminal competitors in the Kertih region, and because Petronas Chemicals will have to compensate Dialog for additional infrastructure and building new tanks as requested by Petronas Chemicals. 33

34 Our assumptions As such, we have assumed a 25% rate reduction at Kertih from FY21F, which we believe is reasonable, as Kertih s PBT margin will remain at a relatively high level of around 60% in the first year of the renewal. We expect negotiations between Dialog and Petronas Chemicals to start soon. We are unclear as to whether the new contract will continue to be on a take-orpay basis, but we have assumed this to be the case, since Dialog is expected to invest in additional infrastructure and will want to be compensated appropriately for the investment. The expected duration of the renewal contract has not been decided, but we have assumed that it will mirror the 20-year duration of Petronas Chemicals gas purchase agreement with Petronas. The lease for the land on which the KCTF is located will last for 60 years to September 2060F, plus another 39 years of optional extension, for a total of 99 years until September 2099F. Our model discounts the cash flows from Kertih until 2060F. This means that we expect Petronas Chemicals petrochemical plants at Kertih to operate at least until 2060F. 34

35 Langsat Tank Terminal Facilities (LTTF) The Langsat Tank Terminals Facilities (LTTF) comprises two terminals, held under Langsat Terminal (One) Sdn Bhd and Langsat Terminal (Two) Sdn Bhd. Trafigura (via Puma Energy Asia Pacific BV) holds a 20% stake in both terminals, while Centralised Terminals Sdn Bhd (CTSB) has an 80% stake. Dialog has a 55% stake in CTSB, while MISC Bhd has a 45% stake. As a result, Dialog has an effective 44% stake in both terminals, with MISC holding an effective 36% stake. Dialog and MISC are currently the operators of the LTTF. Trafigura is the customer or user. Dialog s proposed purchase of MISC s stake is value accretive On 25 September 2017, Dialog announced that it will buy over MISC s 45% stake in CTSB, with the transaction expected to be completed by end-october 2017F. As a result, Dialog will soon have an effective 80% stake in the Langsat terminals, and will consolidate the LTTF financial statements from end-october onwards (LTTF is currently treated as a joint venture). We have reflected this higher effective interest in our earnings forecasts for Dialog, as well as our valuation of the company. Dialog will pay RM137m to MISC in exchange for its 45% interest in CTSB, and will also take over MISC s RM56m shareholder loan to CTSB. We estimate that CTSB s book value was likely RM172m as at 30 June 2017, of which MISC s 45% stake would amount to RM77m. With MISC s equity stake valued at a transaction price of RM137m, we believe MISC may pocket an exceptional disposal gain of RM60m. Despite MISC s book gain of RM60m, we view Dialog s acquisition of MISC s interest in CTSB as being highly favourable to Dialog. In our estimate, the two Langsat terminals are worth some RM1,047m on an equity DCF basis, assuming a 7.6% nominal cost of equity (4.5% real cost of equity), and discounting cash flows to equity until the end of the land lease in 2037F. Hence, the equity DCF value attributable to MISC should be RM377m (RM1,047m x CTSB s 80% stake in the Langsat terminals x MISC s 45% stake in CTSB). It appears that Dialog is buying MISC s stake worth RM377m for a transaction price of only RM137m, or a 64% discount, based on our internal calculations. Land lease concession will end in 2037F, but may be extended Langsat 1 and 2 have a 30-year land lease concession awarded by Tanjung Langsat Port Sdn Bhd beginning from 2007 to 2037F. In its guidance, Dialog mentioned that it is willing to renew the land lease with Tanjung Langsat Port Sdn Bhd once it expires in 2037F, if there is mutual agreement to do so. In our valuation model for the Langsat terminals, we have discounted the cash flows until 2037F, and then discounted the cash flows for another 30 years to 2067F, on the assumption that the land lease will be extended. 35

36 We have assumed that Trafigura will continue using the Langsat terminals Langsat 1 s Phase 1 commenced operations in September 2009, Phase 2 in April 2010 and Phase 3 in August Langsat 2 was operational from December Trafigura signed a contract to lease the terminals on a take-or-pay basis for an initial period of seven firm and seven optional years (7+7 years). These lease contracts commenced when each of the phases became operational. Hence, Trafigura s lease for Langsat 1 s Phase 1 commenced from September 2009, Phase 2 commenced from April 2010, and so on. The utilisation of Langsat 1 and Langsat 2 is currently full. The contract for Phase 1 of Langsat 1 ended in September 2016, and was renewed for another three years to September 2019F, with the remaining 4- year option period not yet exercised. The lease for Langsat 1 s Phase 2 ended in April 2017 and was also renewed. Phase 3 s lease will end in August 2018F, while Langsat 2 s lease will end in December 2019F. In our view, the risks of non-renewal by Trafigura are low since Trafigura had requested for additional infrastructure to be installed at Langsat and was willing to guarantee Dialog additional renewal periods. Also, in the event that Trafigura does not renew in the future, we believe Dialog may still be able to find other customers to rent the tank terminals. This is because the LTTF is not a dedicated facility but a common user facility. In our DCF model, we have assumed that the Langsat terminals will continue to be fully utilised for all forecast years, but we have not assumed any rate increases. 36

37 Pengerang Deepwater Terminal (PDT): SPV1 Pengerang Phase 1, or SPV1 was commissioned over three phases, with a total capacity of 1.3m cbm: Phase 1A has a storage capacity of 432,000 cbm of petroleum products and was operational from April Phase 1B has a storage capacity of 432,000 cbm of petroleum products and was operational from September Phase 1C has a storage capacity of 420,000 cbm of petroleum products and was operational from March Tank leasing periods and rates have improved from the early days The land lease for Pengerang Phase 1, or SPV1, is for 65 years, starting from 2011 to 2076F, with a 34-year optional extension to 2110F. SPV1 is being marketed as an independent, common user terminal. We do not know the identity of the off-takers at SPV1. The tanks are typically leased out for a period of 2-3 years, stretching up to four years in some cases. This is a significant improvement from the 6-12 months lease period when SPV1 was first commissioned in 2014, as users at that time needed to gain confidence in the operations of SPV1. The storage rates offered by SPV1 started out lower than for Singapore, but the rates have now climbed up to approximate parity with the rates in Singapore, according to Dialog. Utilisation of storage capacity at SPV1 became full from mid-2015, and currently remains full. In our valuation model, we have discounted cash flows until FY76F, assuming that the terminal will be remain fully utilised, but are not imputing any rate increases. SPV1 expansion now under way SPV1 has sufficient land to plant an additional 1m cbm of tankage capacity. On 18 August 2017, Vopak, the technical and operating partner, as well as a shareholder for SPV1, announced that the first phase of the expansion will add clean petroleum product tanks of 430,000 cbm to be commissioned progressively from 1QCY19F. Vopak did not give any guidance with respect to the crude storage tanks of 570,000 cbm, but we believe that this will be commissioned by FY20F. In our model, we have factored in capex of RM1bn for the entire 1m cbm expansion, to be 70% funded by debt. 37

38 Pengerang Deepwater Terminal (PDT): SPV2 The Pengerang SPV2 facility is dedicated to Petronas s oil refinery and Petronas Chemicals petrochemical plants at RAPID for 25 years commencing from the time the tanks achieve the Ready for Start-Up Date (RFSD). Upon full completion, we expect SPV2 to have total tankage capacity of 2.1m cbm. Timeline for completion According to Dialog, the marine facilities at SPV2, including the trestle and berths, are expected to be fully commissioned by early-2018f. The petroleum tanks are expected to achieve their Mechanical Completion Date (MCD) by mid-2018f, while the petrochemical tanks should achieve MCD by early-2019f. Typically, the time taken between MCD and RFSD can be of 1-6 months duration. Assuming a 6-month time gap, the petroleum tanks should hit RFSD by early-2019f, while the petrochemical tanks will hit RFSD later, i.e. by mid- 2019F. RFSD is the key commercial milestone, in our view, because the tanks will officially begin earning revenue from their respective RFSD. Even if the actual start-up dates of the RAPID refinery or the petrochemical plants are delayed, the tank terminal operator will begin earning revenue from the tanks that have hit RFSD. This means that SPV2 will begin earning revenue from its petroleum tanks by early-2019f, which is also roughly in line with Petronas s guidance in February 2017 that its RAPID refinery is on track for commissioning by January 2019F. At its expected opening in January 2019F, Dialog expects SPV2 to have a terminal working capacity of 1.2m cbm, overwhelmingly made up of petroleum storage tanks. However, since the RFSD of the petrochemical tanks is expected to be in mid- 2019F, these tanks will only begin earning revenue from that time. Vopak has guided that 1.65m cbm of SPV2 capacity is expected to be commissioned progressively between 2QCY19F and 3QCY19F. We have assumed that the remaining 0.45m cbm of capacity (mix of crude, product and petrochemical tanks) will be added by CY20F, such that we believe the entire 2.1m cbm in SPV2 will be fully built-up by end-cy20f. Hence, we are forecasting an average working capacity of 1.47m cbm for CY19F, rising to an average of 1.89m cbm for CY20F, and then finally the full capacity of 2.1m cbm by CY21F. DCF forecasts pegged to project IRR of 9-10% The land lease for SPV2 is for 65 years starting from 2011 to 2076F, with a 34- year optional extension period to 2110F, for a total land lease period of 99 years. We have discounted cash flows until FY76F for the purposes of the DCF valuation exercise. Hence, we have assumed that Petronas and Petronas Chemicals will renew the lease for the tanks beyond the initial 25-year contract. We have assumed that leasing rates will fall 25% in a single step-down at the 26 th year, with no further rate reductions thereafter. As SPV2 is not yet operational, we do not have any historical financial statements to reference our rate and revenue projections. As such, our forecasts are anchored on Dialog s target of a 9-10% project IRR on all of its investments. Our cash flow forecasts assume that a project IRR of 9.6% will be achieved over the firm lease period of 25 years, and against capex of RM7.7bn, of which we assume 70% will be funded by 10-year project financing. One point to note is that Dialog s original capex guidance for SPV2 was, and remains, RM6.3bn. However, the disclosure in the financial statements for Pengerang Terminals (Two) Sdn Bhd suggests that RM7.7bn is a more up-todate capex cost, with the escalation due primarily to the weaker ringgit. Financially, this would not impact the project IRR returns to Dialog, in our view, as the revenues for SPV2 are US$-denominated. 38

39 Pengerang Deepwater Terminal (PDT): SPV3 The Pengerang SPV3 facility houses an LNG regasification plant and two LNG storage tanks with the capacity to hold 400,000 cbm of LNG in total. The LNG will be imported and stored at the tanks, prior to regasification for supply into the Petronas co-generation plant (which supplies the electricity to RAPID refinery), the steam cracker plant, and the petrochemical plants. The entire LNG regasification plant will be leased to Petronas Gas for 25 years upon commissioning, which we expect to be by end-2017f. SPV3 earns a fixed remuneration fee for the services rendered in terms of importing the LNG, regasifying the LNG and delivering the gas to the users. SPV3 does not take any risk from the fluctuation in gas or LNG prices, which is passed on to the users. DCF forecasts pegged to project IRR of 9-10% The land lease for SPV3 is for 65 years starting from 2011 to 2076F, with a 34- year optional extension period to 2110F, for a total land lease period of 99 years. We have discounted cash flows until FY76F for the purposes of the DCF valuation exercise. Hence, we have assumed that Petronas Gas will renew the lease for the regasification plant and the LNG storage tanks beyond the initial 25-year contract. As with SPV2, we have assumed that leasing rates for SPV3 will fall 25% in a single step-down at the 26 th year, with no further rate reductions thereafter. As SPV3 is not yet operational, we do not have any historical financial statements to reference our rate and revenue projections. As such, our forecasts are anchored on Dialog s target of a 9-10% project IRR on all of its investments. Our cash flow forecasts assume that a project IRR of 9.4% will be achieved over the firm lease period of 25 years, and against capex of RM3.7bn, which will be funded via hybrid financing provided by the banks to the holding company of Pengerang LNG (Two) Sdn Bhd. One point to note is that Dialog s original capex guidance for SPV3 was, and remains, RM2.7bn. However, the disclosure in the financial statements for Pengerang LNG (Two) Sdn Bhd suggest that RM3.7bn is a more up-to-date capex cost, with the escalation due primarily to the weaker ringgit. Financially, this would not impact the project IRR returns to Dialog, in our view, as the revenues for SPV3 are US$-denominated. 39

40 Pengerang expansion in Phase 3 and beyond At Pengerang, Phase 3 and beyond will be developed in the future, according to Dialog, as and when it manages to sign dedicated off-takers. This will encompass the eastern part of the Pengerang Deepwater Terminal (PDT) that has not yet been reclaimed, which is marked as Future in the map below. We believe the cost to reclaim the land area at Phase 3 and beyond may be higher than for Phase 1 and Phase 2, because of the deeper draft. Phase 3 and beyond will be subdivided into SPV5, SPV6, SPV7, etc., with each one in a separate JV structure with separate shareholders, according to Dialog. Figure 13: Current schematic plan for the development of the Pengerang Deepwater Terminal (PDT) Part of future SPV1 development Part of future SPV2 development SOURCE: DIALOG In addition to the to-be-reclaimed land area, more tank terminals can also be built on Dialog s fabrication facilities on the western end of the PDT, on the Buffer Industrial Land, and on the Sungai Rengit Industrial Estate. The total land area yet to be developed is at least 800 acres. The Buffer Industrial Land has already been allocated for the future expansion of SPV1 and SPV2. Most of the Sungai Rengit Industrial Estate will be dedicated for the building of additional tanks, although we believe some portion may be set aside for the construction of chemical plants. An entire industry value-chain is waiting for the commencement of RAPID oil refinery and petrochemical plants before the former can take off, in our view. Focus is on finding dedicated long-term customers The focus for Dialog is to find dedicated customers for Pengerang Phase 3 and beyond, i.e. Dialog will not be looking to build new independent terminals, but rather, prefers to build terminals that are dedicated to industrial customers on long-term charters. This way, Dialog can reduce the risks of additional phases of expansion. Dialog does not want the developments in Phase 3 and beyond to compete against its own independent terminal in Phase 1, in our view, which it is already expanding by 1m cbm to a total of 2.3m cbm by CY20F. Additionally, Dialog is aware of the ongoing plans to construct independent tank terminals at Tanjung Piai and at the Asia Petroleum Hub (APH), both on the southwest corner of Johor, near the Port of Tanjung Pelepas and Jurong 40

41 Island. Both of these two upcoming developments are undergoing various stages of land reclamation, land settlement, and topside construction. If these two developments come onstream, we believe the Singapore Straits region could see more intense competition among operators of independent tank terminals, which could impact utilisation rates and/or average leasing rates, in our view. As such, we believe it makes sense for Dialog to adopt a low-risk expansion philosophy, by focusing on building new dedicated tank terminal facilities in Phase 3 and beyond. Gradual expansion over years; more than 10m cbm of capacity can be added Dialog will work to develop Phase 3 and beyond of the PDT in a gradual and phased manner, over a period of years. We believe Phase 3 and additional SPVs can accommodate at least another 10m cbm of storage capacity, hence we think total PDT storage capacity will eventually likely be approximately 15m cbm. In our valuation of Dialog, we have assumed the following expansion to be phased in: SPV5 to contribute over 52 years from FY24F to FY76F, SPV6 to contribute over 47 years from FY29F to FY76F, SPV7 to contribute over 42 years from FY34F to FY76F, and SPV8 to contribute over 37 years from FY39F to FY76F. We have assumed that each of the SPVs above are similar in scope, land area and capex size as SPV2, and also contribute the same project IRR of 9-10% over the first 25 years of operations. SPV5 is assumed to begin contributing to Dialog five years from today, i.e. FY24F, SPV6 five years after the start of SPV5, and so on. As a result, we have assumed an expansion programme that will take more than 20 years to execute, which is more conservative that Dialog s own target of years. Finally, as we have assumed that the tank storage capacity at SPV5, SPV6, SPV7 and SPV8 are the same size as SPV2 s 2.1m cbm, this means that we have assumed expansion of up to 8.4m cbm of capacity. However, in our estimate and based on Dialog s guidance, Dialog s entire PDT development can accommodate another 10.6m cbm of storage capacity, or thereabouts. Again, on the issue of capacity, we have made more conservative expansion estimates than Dialog s own target. 41

42 Upstream In the upstream segment, Dialog s main earnings contributor is its whollyowned subsidiary, Dialog Resources Sdn Bhd, which has a 20% stake in the Production Sharing Contract (PSC) for the D35, D21 and J4 fields in offshore Sarawak. In FY16, this company booked in EBITDA of approximately RM20m, and we have assumed this run rate to continue for our three-year forecast period (FY18-20F). Dialog also has another wholly-owned subsidiary called Dialog Energy Sdn Bhd, which provides upstream support services. During FY16, this company booked in EBITDA of approximately RM25m, and we have assumed this level of earnings to continue for our forecast period (FY18-20F). Dialog s 50% JV, Halliburton Bayan Petroleum Sdn Bhd, earned RM8m in net profit for CY15, and we have assumed this rate of earnings to also continue for our three-year forecast period (FY18-20F), hence a RM4m net contribution attributable to Dialog s share. Downstream In the downstream segment, Dialog s key business units include: Wholly-owned Dialog Plant Services Sdn Bhd, which performs plant maintenance and catalyst handling services, and also the EPCC works for Pengerang SPV2, Wholly-owned Dialog E & C Sdn Bhd, which also performs EPCC works, notably for SPV1, Wholly-owned Dialog Systems Sdn Bhd, which is involved in the marketing of specialty chemicals, catalysts and absorbents, petroleum additives, drilling base oil, etc., and Dialog Systems (Asia) Pte Ltd, which houses all of Dialog s diverse overseas businesses in the EPCC, fabrication, plant maintenance and catalyst handling services, as well as the sale of specialist products. As most of Dialog s EPCC jobs are internally generated, we believe that Dialog can recognise EPCC revenue of at least RM1bn annually over the next years based on its own tank terminal building works. This assumes that Dialog gets a project the size of SPV2 every five years, which is the assumption that underlies our valuation of Dialog. Since SPV2 s EPCC contract was worth RM5.5bn, this will work out to an average of RM1bn p.a. assuming the project execution takes five years. Assuming a net profit margin of 7% (which is in line with Dialog s guidance of 5-10% net margin), we believe the EPCC business can generate annual net profits of RM70m p.a. over the next years. Meanwhile, we estimate that Dialog should be able to earn net profits of RM30m p.a. over the long term from its plant maintenance and catalyst handling services business, as well as from the sale of specialist products, in Malaysia. Finally, sustainable annual profits of some RM100m p.a. from Dialog Systems (Asia) Pte Ltd is not unrealistic, in our view, as it has been generating this level of profits in the past 2-3 financial years. 42

43 Figure 14: SWOT analysis SWOT ANALYSIS Strengths The stable, long-term tank terminals business underpins Dialog's low earnings risks. Dialog's EPCC arm will be busy with Dialog's own tank terminals for years. Dialog has tied in strong JV partners like Vopak, Petronas, and Trafigura as coowners of its tank terminals, spreading risk and increasing user commitment. Dialog has a strong balance sheet position, with zero net debt as at 30 Jun Weaknesses Term leases at Pengerang SPV1 last for 2-4 years with no guarantees of renewal. Trafigura leased the Langsat terminals for 7 firm + 7 option years, with expiry of the firm period by 2018F latest; renewal is likely but not guaranteed. If oil prices remain weak, Dialog's upstream investments are not likely to yield substantial returns. Opportunities Dialog is concurrently building SPV2, SPV3, and the new expansion at SPV1, which will result in a significant expansion of its current capacity and revenue streams. The presence of Petronas oil refineries and petrochemical plants creates an industrial park that will attract more of such companies, growing demand for tank storage. Dialog still has substantial land area at Pengerang to expand its tank terminals. Threats New independent tank terminals are being planned at Tanjung Piai and at the Asia Petroleum Hub, southwest Johor. These may compete with Dialog's SPV1. The Kertih Centralised Tankage Facilities will see its 20-year lease to the Petronas Chemicals group end in 2020F; the renewal period may see leasing rates fall. If offshore gas runs dry, the Kertih petrochemical plants face an uncertain future. SOURCES: CIMB, COMPANY REPORTS Strengths We believe Dialog has very strategic tank terminal assets. There are no alternative tank terminal facilities in Kertih, and its petrochemical customers are obligated to continue using Dialog s tank farm. It also has two key assets in the Singapore Straits, which have been included in Platts s delivery locations of FOB Singapore pricing benchmarks since 1 July These core advantages of its stable, long-term tank terminals business underpin Dialog s low earnings risks, in our view. Dialog s EPCC arm is now largely occupied with the construction and commissioning of the tank farms of its tank terminal JVs. As a result, the EPCC unit is only minimally reliant on external work, which is generally in short supply in the present oil and gas downcycle. With a lot more land space as yet undeveloped in Pengerang, we expect Dialog s EPCC arm to be busy with inhouse jobs for the next years. We believe Dialog is cognizant of the tank terminals business risks, since it is an independent owner and not an oil trader with cargoes to store. As such, Dialog looks for partners to share in the risks and rewards of the tank terminals business. Vopak is its equity and technical partner for Pengerang SPV1 and SPV2, sharing the latest technological know-how so that best-in-class tank terminals can be planted. Other JV partners include users like Petronas, Petronas Chemicals, Petronas Gas, and Trafigura, which we believe support continued user commitment to the tank terminals. Dialog has a strong balance sheet, with zero net debt as at 30 June Much of the debt is comprised of project financing debt which has been taken by the individual tank terminals, but these are accounted for as JVs or associates, and hence, their debts are not consolidated into Dialog s group accounts. In any case, Dialog s strong balance sheet should allow the company to be able to easily fund the equity portion of any expansion to its tank terminals business in the future, in our view. Weaknesses Dialog s Pengerang SPV1 tank terminal is an independent facility, and tank leases are typically for a term of 2-4 years, with no guarantee of renewal. A portion of tank capacity (perhaps around 15%) is set aside for spot storage demand, and spot demand can fluctuate from time to time. This means that there may be a certain amount of volatility in SPV1 s earnings. However, we are not too concerned because SPV1 is adjacent to the RAPID development, and we believe it will be able to benefit from the synergies of that proximity. As for the Langsat terminals, Trafigura s leases are for seven firm and seven optional years, and there is no guarantee of renewal thereafter. However, we are not overly concerned, as Trafigura is a 20% shareholder of the Langsat terminals and we believe it will probably work to ensure the viability of its own investment. 43

44 If oil prices remain weak, Dialog s OSC and PSC assets may not yield significant return, given that production volumes from these two upstream assets are low as they are already mature assets. Opportunities Dialog is currently building up Pengerang SPV2 and SPV3, with SPV2 expected by Dialog to be completed by CY19F and SPV3 by end-cy17f. As such, over the next few financial years, we expect Dialog to deliver strong growth in its tank terminal capacity, revenues and profits. Dialog s Pengerang Deepwater Terminal (PDT) development was conceived before Petronas and Petronas Chemicals made their decision to base their oil refinery and petrochemical plants at Pengerang. However, in our view, the latter two companies entry into Pengerang strengthens the economic viability of PDT as the beginnings of an industrial park and oil and gas hub are coming into place. We believe this will encourage more oil and gas and petrochemical or chemical companies to consider opening at Pengerang, which will then generate even more demand for tank storage facilities at PDT. Dialog still has plenty of land left to develop at Pengerang. SPV1 and SPV2 will in total have 4.4m cbm of tank terminal capacity once fully developed, but we believe that Pengerang has enough land and jetty space to accommodate a further 10.6m cbm of tankage capacity, for a total fully built-up capacity of 15m cbm. Threats New independent tank terminals are currently being developed at the Tanjung Piai Maritime Industrial Park (TPMIP) and at the Asia Petroleum Hub (APH), both at the southwest corner of Johor, near to Jurong Island. These may compete with Dialog s SPV1 for the marginal customer. Having said that, we believe that SPV1 still has the upper hand since it is directly linked by pipeline to the RAPID development. Also, the TPMIP and APH developments have not yet finalised their off-takers and Dialog has several years first-mover advantage. Meanwhile, the Kertih terminal will see its initial 20-year lease end by 2020F, and we expect the tank lease rates to fall. We believe that rates will not fall by much, as there are no alternative tank terminals at Kertih, and because the Petronas Chemicals group of companies want Dialog to add additional infrastructure at Kertih. We have assumed that leasing rates will fall by 25% from FY21F onwards. Finally, if the ethane supply from the gas fields offshore Kertih dry up, the future of the Kertih petrochemical complex, which depends on ethane as feedstock rather than naphtha, is at risk. Based on guidance from Petronas Chemicals, there should be enough gas to last at least the next 15 years. If the offshore gas indeed runs out, petrochemical plants at Kertih have the option of importing ethane from the US shale has fields. 44

45 RISKS Tank terminal leases may not be renewed The term leases for the independent Pengerang SPV1 tank terminal are for relatively short durations of 2-3 years, with some leases extending to four years. Meanwhile, Trafigura s leases for the Langsat terminals are for an initial period of seven years, plus option periods of up to an additional seven years. These leasing durations are significantly shorter than for the dedicated, industrial terminals of Pengerang SPV2 and SPV3, which are for 25 years. While all of Dialog s tank terminals are currently fully utilised, there is no assurance that the SPV1 and Langsat terminals will remain fully utilised or that the lessees will renew their hire of the storage tanks. Nevertheless, while we acknowledge that these risks exist, we strongly believe that utilisation will remain high for the Langsat terminals because Trafigura is a shareholder, and because SPV1 has a unique offering in that it is linked via pipeline to the Petronas RAPID refinery. As such, oil traders that lease tanks at SPV1 will have access to supply crude oil to the refinery, as well as get access to the refined products for onward export. Leasing rates may come under pressure If competition escalates in the future, e.g. from the up-and-coming Tanjung Piai Maritime Industrial Park (TPMIP) or from the Asia Petroleum Hub (APH) projects in southwest Johor, the leasing rates for SPV1 and Langsat may come under pressure. In the event that competition materialises, Langsat is more at risk of pricing pressure, in our view, given that it has a shallower draft than TPMIP and it is not linked to the wider Pengerang industrial complex, as SPV1 is. Also, as the Kertih terminal s 20-year contract is coming to an end in 2020F, we expect the Petronas Chemicals group to renegotiate rates down. We have pencilled in a 25% rate decline, but note that Dialog is very confident that the rate pressure will not be significant. Land leases may not be renewed The land lease from the Tanjung Langsat Port is for 30 years only, until 2037F, which is short relative to the 60-year land lease at Kertih and the 65-year land lease at Pengerang. If the Tanjung Langsat Port does not renew the land lease, Dialog will no longer be able to operate the Langsat terminals. Alternatively, if the land lease is renewed, there is a potential for the leasing costs to be increased, which could impact the profitability of the terminals. Crude oil production cuts can impact tank storage utilisation rates and also oil prices Oil prices have been rising of late, due to OPEC and non-opec action to curtail oil production since the start of 2017F. OPEC and non-opec are now considering various measures to potentially extend the duration of the output cuts to the end of 2018F, in our view. Higher oil prices are positive for Dialog s upstream businesses, as Dialog takes a share of the production from the PSC and OSC fields. On the other hand, crude oil production cuts may reduce the crude oil and refined product inventories globally, and therefore, contribute towards a reduction in the volume of tank storage needed around the world. As noted in Appendix 1, utilisation or occupancy rates at Vopak s terminals have declined over the past four quarters and it has guided for an average utilisation of 90% for 2017F, which is 3% pts lower than the 93% seen during This is likely due to the capacity increases that Vopak has commissioned and also because of the OPEC and non-opec oil production cuts that has led to some degree of inventory destocking across the globe. 45

46 FINANCIALS Tank terminals P&L forecast Figure 15: Tank terminal business - Proforma consolidated accounts (FYE June) Profit and Loss Statement (RM m) We forecast the tank terminals business to deliver very strong earnings growth over the next three forecast years (FY18-20F), driven by the commissioning of its Pengerang SPV2 and SPV3 projects, the increase in capacity at SPV1, and the higher effective stake in the Langsat tank terminals. FY13 FY14 FY15 FY16 FY17 FY18F FY19F FY20F Revenue , , Kertih Langsat SPV SPV SPV Direct cost EBITDA , , Kertih Langsat SPV SPV SPV EBITDA margin (%) 90.9% 87.9% 78.6% 87.8% 89.0% 89.6% 90.0% 90.0% - Kertih 91.6% 91.2% 91.3% 91.2% 91.1% 91.1% 91.1% 91.1% - Langsat 93.1% 91.9% 90.6% 89.3% 91.1% 91.1% 91.1% 91.1% - SPV1-24.1% 22.3% 87.3% 90.0% 90.0% 89.5% 89.2% - SPV2 89.5% 90.0% - SPV3 88.9% 90.0% 90.0% Depreciation Amortisation EBIT (operating profit) , Kertih Langsat SPV SPV SPV EBIT margin (%) 73.4% 67.4% 49.2% 63.9% 66.3% 65.9% 67.0% 66.7% - Kertih 80.3% 78.9% 79.1% 79.2% 79.1% 79.2% 79.2% 79.2% - Langsat 62.9% 61.4% 61.2% 59.0% 63.7% 63.7% 63.7% 63.7% - SPV % -65.4% 55.9% 60.5% 60.5% 66.9% 64.9% - SPV2 65.5% 66.7% - SPV3 62.7% 63.8% 63.8% Other income/(expenses) Interest revenue Interest expense Profit before associates ,072.3 Margin (%) 68.1% 63.6% 25.3% 37.8% 41.8% 49.9% 54.4% 53.2% NOTE: DIRECT COSTS INCLUDE STAFF, MAINTENANCE, INSURANCE, ETC. SOURCE: CIMB FORECASTS, COMPANY 46

47 Figure 16: Tank terminal business - Proforma consolidated accounts (FYE June) Profit and Loss Statement (RM m) Apart from the Langsat terminals which will be consolidated as an 80%-owned subsidiary from late-october 2017F, all the other tank terminals are treated as either JVs or associates, and hence, are equity accounted into Dialog s consolidated financial statements. In the interest of transparency, we have produced proforma consolidated financial statements for Dialog s tank terminals, as shown here. FY13 FY14 FY15 FY16 FY17 FY18F FY19F FY20F Profit before associates ,072.3 Margin (%) 68.1% 63.6% 25.3% 37.8% 41.8% 49.9% 54.4% 53.2% Associates / JVs Exceptionals Profit before tax , Kertih Langsat SPV SPV SPV PBT margin (%) 68.5% 64.0% 29.8% 37.3% 41.2% 49.9% 54.4% 53.2% - Kertih 89.5% 91.3% 68.9% 68.8% 68.4% 68.3% 68.4% 68.4% - Langsat 26.7% 28.4% 32.8% 28.6% 38.5% 41.0% 43.7% 46.7% - SPV % -99.2% 18.7% 26.1% 28.8% 40.4% 43.4% - SPV2 50.1% 49.5% - SPV3 62.2% 64.0% 63.5% PBT ex-exceptionals ,072.3 Tax Effective tax rate (%) 22.5% 24.1% 32.9% 17.8% 15.3% 9.0% 4.7% 3.5% Profit before minority interest , Kertih Langsat SPV SPV SPV Minority interest Kertih (70%) Langsat (56% until Oct 2017F, 20% after) SPV1 (54%) SPV2 (75%) SPV3 (75%) Attributable profit Kertih (30%) Langsat (44% until Oct 2017F, 80% after) SPV1 (46%) SPV2 (25%) SPV3 (25%) Core net profit Kertih (30%) Langsat (44% until Oct 2017F, 80% after) SPV1 (46%) SPV2 (25%) SPV3 (25%) SOURCE: CIMB FORECASTS, COMPANY 47

48 Figure 17: Tank terminal business - Proforma consolidated accounts (FYE June) Assumptions FY13 FY14 FY15 FY16 FY17 FY18F FY19F FY20F Total nominal storage capacity (000 cbm) 1,047 1,479 2,347 2,347 2,347 2,547 3,912 5,427 - Kertih Langsat * Langsat * Langsat SPV ,300 1,300 1,300 1,300 1,730 2,300 * SPV1 original 432 1,300 1,300 1,300 1,300 1,300 1,300 * SPV1 expansion 430 1,000 - SPV ,680 - SPV Dialog's equity share of capacity (000 cbm) ,003 1,003 1,003 1,208 1,717 2,216 - Kertih (30%) Langsat (44% until Oct 2017F, 80% after) * Langsat 1 (44% until Oct 2017F, 80% after) * Langsat 2 (44% until Oct 2017F, 80% after) SPV1 (46%) ,058 * SPV1 original (46%) * SPV1 expansion (46%) SPV2 (25%) SPV3 (25%) Assumed used nominal capacity (000 cbm) 982 1,047 1,372 2,185 2,250 2,450 3,772 5,230 - Kertih Langsat * Langsat * Langsat SPV ,235 1,235 1,235 1,622 2,135 * SPV1 original ,235 1,235 1,235 1,235 1,235 * SPV1 expansion SPV ,680 - SPV Assumed utilisation rate (%) 93.8% 70.8% 58.5% 93.1% 95.9% 96.2% 96.4% 96.4% - Kertih 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% - Langsat 90.0% 90.0% 90.0% 85.0% 95.0% 95.0% 95.0% 95.0% * Langsat % 90.0% 90.0% 85.0% 95.0% 95.0% 95.0% 95.0% * Langsat % 90.0% 90.0% 85.0% 95.0% 95.0% 95.0% 95.0% - SPV1 15.0% 30.0% 95.0% 95.0% 95.0% 93.8% 92.8% * SPV1 original 15.0% 30.0% 95.0% 95.0% 95.0% 95.0% 95.0% * SPV1 expansion 90.0% 90.0% - SPV % 100.0% - SPV % 100.0% 100.0% Assumed average rates (RM/cbm/mth) Kertih Langsat * Langsat * Langsat SPV * SPV1 original * SPV1 expansion SPV SPV SOURCE: CIMB FORECASTS AND ASSUMPTIONS, COMPANY 48

49 Figure 18: Dialog Profit and Loss Statement (FYE June) Dialog Group Bhd annual P&L forecasts We expect Dialog to deliver very strong earnings growth over the next three forecast years, because of the growth in tank terminal profits, as mentioned earlier. RM m FY2015 FY2016 FY2017 FY2018F FY2019F FY2020F Revenue 2, , , , , , Tank terminals Upstream Downstream Integrated technical services 2, , , , , , Others Direct cost -1, , , , , ,000.7 EBITDA Tank terminals Upstream Downstream Integrated technical services Others EBITDA margin (%) 17.1% 12.8% 11.0% 12.4% 13.3% 13.2% Depreciation Amortisation EBIT (operating profit) EBIT Margin (%) 15.0% 10.4% 8.1% 9.7% 10.0% 9.9% Other income/(expense) Interest revenue Interest expense Profit before associates Margin (%) 14.5% 10.4% 8.8% 9.0% 8.4% 8.3% Associates / JVs Tank terminals Upstream Others Exceptionals PBT PBT margin (%) 15.7% 14.5% 13.2% 12.5% 14.9% 17.0% PBT ex-exceptionals Tax Current tax Deferred tax Effective tax rate (%) 23.0% 18.3% 16.9% 16.3% 11.9% 10.0% Profit before MI MI Attributable profit Core net profit SOURCES: CIMB, COMPANY REPORTS 49

50 Figure 19: Dialog Profit and Loss Statement (FYE June) - continued RM m FY2015 FY2016 FY2017 FY2018F FY2019F FY2020F Breakdown of exceptionals Foreign exchange gain/(loss) Gain/(loss) on disposal of PPE Gain/(loss) on disposal of subsidiary Gain/(loss) on forward exchange contract Impairment losses * Receivables * Goodwill * Other investment Reconciliation to core net profit Attributable profit Remove: Exceptionals /- Tax effect on excep Deferred tax provisions Core net profit * Subsidiaries * JVs and associates Core net profit * Tank terminals * JVs and associates Basic no of O/Shares 5, , , , , ,641.6 Weighted no of ordinary shares 4, , , , , ,641.6 Basic EPS (sen) Core EPS (sen) SOURCES: CIMB, COMPANY REPORTS Figure 20: Dialog's annual core net profit/(loss) (RM m) - actual and our estimates Core net profit - subsidiaries (RM m) Core net profit - JVs & associates (RM m) FY2015 FY2016 FY2017 FY2018F FY2019F FY2020F SOURCES: CIMB, COMPANY REPORTS 50

51 Dividend policy Dialog s dividend payout policy is 40% of its attributable profit. With respect to FY17, Dialog declared 2.65 sen/share in dividend, up from 2.20 sen/share in each of FY15 and FY16. For future years, we are assuming that Dialog maintains its 40% payout policy. Capital raising exercises In order to fund the Pengerang project, Dialog executed a 2-for-10 rights issue in January 2012 priced at RM1.20/rights share, which raised gross proceeds of RM476.2m. In subsequent years, the proceeds from the exercise of ESOS shares and warrants raised another RM545m, which was more than enough to fund Dialog s equity requirements for SPV1, SPV2 and SPV3. Figure 21: Results comparison Recent quarterly results FYE Jun (RM m) 4QFY17 4QFY16 yoy % 3QFY17 qoq % 4QFY17 4QFY16 yoy % chg chg Cum Cum chg Comments Revenue , , Rev rose yoy mainly due to the ongoing EPCC works for Operating costs (871.4) (650.6) 33.9 (818.2) 6.5 (3,034.8) (2,210.7) 37.3 Pengerang SPV2, and the LNG terminal at SPV3. Other EBITDA projects include the Jetty Topside works for Samsung in EBITDA margin (%) Pengerang and the construction of plasticiser plant for UPC Depn & amort. (21.2) (18.1) 17.1 (21.0) 0.9 (81.7) (60.9) 34.3 Chemicals in Kuantan. EBIT EBITDA and EBIT margins fell yoy as the final stage of Interest expense (10.0) (6.6) 51.6 (9.1) 9.3 (32.3) (25.1) 28.6 construction of Pengerang Phase 2 involves procurement Interest & invt inc of the tanks and other materials, which is typically is of Associates' contrib (1.4) 28.6 (0.7) lower margin. Exceptionals (57.4) 12.5 (56.6) Associate contributions increased as Pengerang Phase 1 Pretax profit tank terminals became fully utilised during FY17 and also Tax (21.0) (12.0) 75.0 (21.9) (3.9) (75.7) (67.4) 12.3 secured higher storage rates. Tax rate (%) Minority interests 2.7 (0.3) (986.4) (3.4) (178.0) (2.5) (6.4) (61.5) Net profit Core net profit Dialog's FY17 core net profit rose 32% yoy while for 4Q17 EPS (sen) rose 81% yoy, due to higher contribution from EPCC Core EPS (sen) works in Malaysia, and from Pengerang Phase 1. SOURCES: CIMB, COMPANY REPORTS Figure 22: Dialog's quarterly core net profit/(loss) (RM m) Jul-Sep 2013 Oct-Dec 2013 Jan-Mar 2014 Apr-Jun 2014 Jul-Sep 2014 Oct-Dec 2014 Jan-Mar 2015 Apr-Jun 2015 Jul-Sep 2015 Oct-Dec 2015 Jan-Mar 2016 Apr-Jun 2016 Jul-Sep 2016 Oct-Dec 2016 Jan-Mar 2017 Apr-Jun 2017 SOURCE: CIMB RESEARCH, COMPANY 51

52 Figure 23: Malaysia P&L (RM m) FYE Jun (RM m) 4QFY17 4QFY16 yoy % 3QFY17 qoq % 4QFY17 4QFY16 yoy % chg chg Cum Cum chg Comments Revenue , , Rev rose yoy mainly due to the ongoing EPCC works for Pengerang Operating costs (650.5) (455.6) 42.8 (590.1) 10.2 (2,163.9) (1,363.4) 58.7 Phase 2, and the Pengerang LNG terminal. Other on-going EBITDA projects include the Jetty Topside works for Samsung in EBITDA margin (%) Pengerang and the construction of plasticiser plant for UPC Depn & amort. (14.7) (11.2) 30.6 (14.3) 2.5 (55.7) (33.2) 67.8 Chemicals in Kuantan. EBIT EBITDA and EBIT margins fell yoy as the final stage of construction EBIT margin (%) of Pengerang Phase 2 involves procurement of the tanks and Interest expense (8.6) (5.3) 61.7 (7.5) 15.3 (26.3) (19.9) 32.3 other materials, which typically is of lower margin. Interest income Profit before tax and assoc/jv Associate contributions increased as Pengerang Phase 1 tank Associates' contrib terminals became fully utilised during FY17 and also secured Pretax profit higher storage rates. SOURCES: CIMB, COMPANY REPORTS Figure 24: Singapore P&L (RM m) FYE Jun (RM m) 4QFY17 4QFY16 yoy % 3QFY17 qoq % 4QFY17 4QFY16 yoy % chg chg Cum Cum chg Comments Revenue Singapore's revenue rose due to more EPCC works, despite lower Operating costs (34.2) (30.2) 13.0 (32.4) 5.4 (130.5) (79.4) 64.5 sales of specialist products and services. We believe the higher EBITDA proportion of EPCC works in the revenue base probably depressed EBITDA margin (%) EBITDA margins. Depn & amort. (0.6) (1.0) (36.0) (0.6) (2.6) (2.6) (4.2) (36.8) EBIT nm The Singapore business recorded gains on property disposal in EBIT margin (%) QFY17 which lifted the EBITDA and EBIT levels for FY17. Interest expense - (0.0) (100.0) - nm (0.0) (0.0) 22.5 Interest income (10.2) 0.4 (15.5) Profit before tax and assoc/jv Associates' contrib Pretax profit SOURCES: CIMB, COMPANY REPORTS Figure 25: Middle East & Others P&L (RM m) FYE Jun (RM m) 4QFY17 4QFY16 yoy % 3QFY17 qoq % 4QFY17 4QFY16 yoy % chg chg Cum Cum chg Comments Revenue (9.2) (7.7) During FY17, Dialog's overseas units saw lower sales of Operating costs (173.1) (151.1) 14.5 (181.2) (4.5) (683.1) (726.2) (5.9) specialist products and services, due to slower upstream EBITDA (11.7) 29.2 (38.3) (19.4) activities, although for 2HFY17, there was some pick-up in EBITDA margin (%) India, Russia and Middle East. Depn & amort. (5.9) (5.9) (0.0) (6.0) (2.5) (23.4) (23.5) (0.4) EBIT (16.5) 23.2 (47.5) (24.5) EBIT margin (%) Interest expense (1.4) (1.5) (5.2) (1.7) (17.4) (5.9) (5.2) 14.5 Interest income (24.6) 0.3 (83.8) Profit before tax and assoc/jv (17.7) 21.8 (50.4) (26.4) Associates' contrib nm Pretax profit SOURCES: CIMB, COMPANY REPORTS 52

53 Figure 26: Results comparison FYE Jun (RM m) 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 Revenue Operating costs (457.5) (466.1) (539.4) (554.6) (650.6) (584.8) (760.4) (818.2) (871.4) EBITDA EBITDA margin (%) Depn & amort. (12.3) (14.0) (14.6) (14.2) (18.1) (18.6) (21.0) (21.0) (21.2) EBIT Interest expense (6.5) (5.9) (6.3) (6.3) (6.6) (6.7) (6.4) (9.1) (10.0) Interest & invt inc (3.6) Associates' contrib (1.3) Exceptionals (5.5) Pretax profit Tax (24.6) (18.0) (20.5) (16.9) (12.0) (14.4) (18.4) (21.9) (21.0) Tax rate (%) Minority interests (1.6) (2.5) (2.4) (1.3) (0.3) 0.0 (1.7) (3.4) 2.7 Net profit Core net profit EPS (sen) Core EPS (sen) Breakdown of exceptionals (5.5) Foreign exchange gain/(loss) Gain/(loss) on disposal of PPE Gain/(loss) on disposal of subsidiary (2.1) Gain/(loss) on forward exchange contract (0.1) 0.0 (0.1) Impairment losses (9.8) (0.0) - - (0.0) - Others SOURCES: CIMB, COMPANY REPORTS 53

54 Figure 27: Regional P&L (RM m) Malaysia P&L (RM m) FYE Jun (RM m) 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 Revenue Operating costs (251.7) (260.3) (293.9) (353.7) (455.6) (394.9) (528.3) (590.1) (650.5) EBITDA EBITDA margin (%) Depn & amort. (6.0) (7.1) (7.4) (7.5) (11.2) (12.3) (14.4) (14.3) (14.7) EBIT EBIT margin (%) Interest expense (5.0) (4.6) (5.0) (4.9) (5.3) (5.4) (4.8) (7.5) (8.6) Interest income Profit before tax and assoc/jvs Associates' contrib (1.3) Pretax profit Singapore P&L (RM m) FYE Jun (RM m) 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 Revenue Operating costs (83.2) (14.2) (18.9) (16.0) (30.2) (25.1) (38.8) (32.4) (34.2) EBITDA (9.3) EBITDA margin (%) (12.6) Depn & amort. (1.1) (1.1) (1.1) (0.9) (1.0) (0.7) (0.7) (0.6) (0.6) EBIT (10.4) 0.4 (0.7) EBIT margin (%) (14.1) 2.4 (3.4) Interest expense (0.0) (0.1) (0.1) 0.2 (0.0) (0.0) Interest income Profit before tax and assoc/jvs (10.3) 0.3 (0.6) Associates' contrib (0.0) (0.0) (0.0) Pretax profit (10.4) 0.3 (0.5) Middle East & Others P&L (RM m) FYE Jun (RM m) 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 Revenue Operating costs (137.1) (178.1) (223.6) (173.4) (151.1) (144.8) (184.1) (181.2) (173.1) EBITDA EBITDA margin (%) Depn & amort. (5.3) (5.8) (6.0) (5.8) (5.9) (5.6) (5.9) (6.0) (5.9) EBIT EBIT margin (%) Interest expense (1.5) (1.2) (1.2) (1.4) (1.5) (1.3) (1.6) (1.7) (1.4) Interest income Profit before tax and assoc/jvs Associates' contrib (0.1) 0.0 (0.0) (0.0) (0.1) 0.0 (1.3) 0.2 (1.1) Pretax profit SOURCES: CIMB, COMPANY REPORTS 54

55 VALUATION AND RECOMMENDATION Initiate with an Add, target price of RM3.07 We initiate coverage of Dialog with an Add recommendation, and an SOPbased target price of RM3.07. The company not only has strong earnings prospects, but it also adopts a low-risk business philosophy, and we believe its seamless execution in the past has demonstrated the depth and quality of its management team. We believe that the company s growth will be well planned and packaged with low business and financial risks. Excellent earnings growth prospects across all businesses We believe that Dialog has excellent growth prospects ahead of it. Over the next three forecast years (FY18-20F), we expect core net profit to rise by 58% cumulatively, as its major Pengerang Deepwater Terminal (PDT) projects are progressively commissioned. These include SPV3 s regasification terminal and LNG storage tanks that will commence their 25-year lease to Petronas Gas from end-cy17f, SPV2 s crude oil, petroleum product and petrochemical tanks that will commence their 25-year lease to Petronas and Petronas Chemicals gradually starting from early CY19F, and SPV1 s expansion of its tankage capacity that we expect will be progressively commissioned during CY19F and CY20F. In addition, Dialog will increase its effective stake in the Langsat terminals from the existing 44% to 80% by end-october 2017F, thus enabling more of the profits to be included in the consolidated accounts. Once fully built-up, the existing Phase 1 and Phase 2 PDT developments will have 4.4m cbm of oil storage capacity, and we believe the available land area at PDT will be sufficient to accommodate a further 10.6m cbm of tankage capacity, for a total capacity of around 15m cbm. Once fully developed, Dialog s nominal tank capacity at Pengerang will more than triple. Assuming that Dialog will have a minority 25% equity stake in all future phases of expansion at Pengerang, Dialog s equity share in the tankage capacity at Pengerang will still almost triple. As such, we believe Dialog s EPCC arm will likely be busy with all the in-house tank terminal EPCC jobs for the next years. We also think Dialog will likely see a greater volume of plant maintenance and catalyst handling service contracts being offered to the market, once Petronas s oil refinery and Petronas Chemicals three petrochemical plants are commissioned from 2019F onwards. We also believe that the prospects for the sale of specialist products like base drilling oil will improve, now that Petronas has dramatically increased production and development drilling in Malaysia from mid-2017f onwards (relative to the lows seen in ), and the global utilisation of jack-up drilling rigs is creeping up, from a low of 64% in January 2017 to 66% in September In the Southeast Asian region alone, utilisation of jack-up drilling rigs has risen from a low of 34% in November 2016 to 57% in September Finally, Dialog has exposure to the fluctuation of oil and gas prices, by virtue of its upstream involvement in the PSC and OSC businesses. Higher energy prices will feed through directly to improvements in the profitability of these businesses. Low-risk business philosophy Dialog runs its business with an eye for low-risk growth. For instance, all of its tank terminals are based on a JV structure, where key partners are roped in to share the capex risk. Vopak is a partner in two Pengerang JVs, in order to provide technical expertise in the leading and latest technologies for tank terminal operations. Dialog benefits because its terminals in Pengerang are at the cutting edge, relative to older terminals in Jurong Island. Terminal users like Trafigura, Petronas, Petronas Chemicals and Petronas Gas have also been 55

56 roped in as JV partners, to ensure their commitment to continued use of the terminals. Dialog s in-house expertise in EPCC work also ensures that construction risks during the tank terminal building stage are reduced as much as possible, in our view. Dialog adopts the negotiated alliancing method of project management. This means that the project management team is a unified single entity made up of personnel from different shareholders, so that the communication and cooperation between partners can be more integrated. For future Pengerang phases, Dialog is not looking to build any more independent terminals, but rather will look for dedicated off-takers who will be willing to lease the tanks for very long durations. For instance, Pengerang SPV2 and SPV3 are leased out for 25 years to the Petronas group of companies. Conversely, independent or common-user terminals like Langsat and Pengerang SPV1 are leased out for much shorter durations. Trafigura, as the main user of the Langsat terminals, initially leased the tanks for seven firm and seven optional years, and for the earliest phase, had renewed the lease for only three of the seven optional years. SPV1 s term leases typically are for 2-3 year durations, although some leases extend into the fourth year, and there is also a certain proportion of its tanks that are set aside for spot storage demand, which by definition, is not guaranteed. Dialog, together with its JV partners, has kicked off an expansion of the SPV1 independent terminal, to raise capacity from 1.3m cbm to 1.7m cbm by CY19F, and then ultimately to 2.3m cbm by CY20F. This will probably be the last major expansion of the independent tank terminal model, in our view, as Dialog does not want to create overcapacity in independent tank storage capacity in the Singapore Straits region, which could end up hurting Dialog, itself. Furthermore, the upcoming Tanjung Piai Maritime Industrial Park (TPMIP) and the Asia Petroleum Hub (APH) developments are also being marketed as independent terminals, and we believe these may eventually compete with Pengerang SPV1 if they are ultimately commissioned. Being aware of such developments, we believe that Dialog is scouring the world for potential new refineries, petrochemical, or chemical plants to be based at Pengerang, which would naturally generate demand for dedicated industrial tank terminals. We believe these companies would be encouraged to plant capacity at Pengerang because of the beneficial industrial park hub ecosystem that will come into existence once Petronas opens its RAPID refinery and steam cracker, and Petronas Chemicals commissions its three petrochemical plants. Dialog s low-risk philosophy extends to its borrowings. The currency of its borrowings mirrors the underlying revenue currencies of the various entities. For instance, Pengerang SPV1 s revenue currency is denominated in S$, hence its borrowings are also in S$. Conversely, the revenue currency for Pengerang SPV2 and SPV3 is denominated in US$, hence their project financing debt are also denominated in US$. In this way, these tank terminal JVs and associates reduce their exposure to foreign currency risk. On the interest rate front, more than 80% of Pengerang SPV1 s borrowings have been swapped from floating to fixed interest rates by way of interest rate derivatives. We expect the same to be executed for loans related to SPV2 and SPV3, as well as for future phases of Pengerang s expansion. In conclusion, Dialog has been executing its business growth very carefully and very intelligently, in our view, with an eye for growth prospects, but at the same time, with an eagle eye focus on the control of construction, capex, operating, and financial risks. We believe the depth and experience of its management team mean that the company s business philosophy is being executed with finesse. There are very few companies in Malaysia that can boast of such strong dynamics, in our opinion. As such, for the purposes of our DCF valuation exercise, we are adopting a very low beta of 0.6, which we believe is justified based on Dialog s low risk profile and strong growth prospects, which are enhanced by Petronas s entry into Pengerang. Over the past two years, Dialog s beta has been around 0.8x, but we believe that the beta should drop further as Dialog executes its low-risk 56

57 business growth. We have discounted the cash flow-to-equity forecasts of the tank terminal business using a real cost of equity of 4.5%, as shown below. Figure 28: Cost of equity calculation Risk-free rate 4.0% Equity risk premium 6.0% Beta 0.60 Cost of equity (nominal) 7.6% Inflation rate (%) 3.0% Cost of equity (real) 4.5% SOURCES: CIMB, BLOOMBERG SOP valuation of RM2.22 based on the existing portfolio of activity, RM3.07 including the potential from Pengerang s long-term expansion Our SOP valuation for Dialog is based on a combination of DCF, book value, and P/E multiples for its various businesses. Tank terminals: DCF valuation For the tank terminals business, we believe the DCF methodology is best suited for its valuation, due to stability of earnings and well-defined contractual periods. We have discounted cash flows from the Kertih terminal until 2060F, which is the end of its land lease. Kertih s 20-year tank lease contract with the Petronas Chemicals group will end in 2020F, upon which we think it will be renewed at a lower rate; we have pencilled in a 25% drop in rates. In 2016, Petronas Chemicals signed a 20-year ethane purchase agreement with Petronas, to buy the feedstock from the fields offshore Terengganu. There is some uncertainty over whether the gas supply will last beyond the next 20 years, but we have assumed that the petrochemical plants at Kertih will import ethane from the shale gas fields in the US to sustain their operations, in the event that the gas fields offshore Terengganu dry up. As such, we have assumed that demand for Dialog s tank terminals at Kertih will continue until the end of its land lease in 2060F. In the event that domestic ethane supply does not last beyond 2040F, our SOP valuation will be reduced by 2 sen/share. The cash flows from the Langsat terminals have been forecast until 2037F, which is when the current 30-year land lease expires. We have also done a separate DCF valuation from 2037F to 2067F, on the assumption that the land lease will be renewed for a further 30 years. In the event that the latter assumption is untrue, the impact will be to remove 11 sen/share from our valuation of Dialog. Although the Langsat terminals suffer from shallow draft and can only accommodate aframax tankers of 80,000 dwt to 120,000 dwt, we have assumed that Trafigura will continue to use the Langsat terminals as long as they continue to be operational, since Trafigura is a 20% stakeholder in the terminals and should therefore have the financial incentive to make the terminals a success. The land lease of Phases 1 and 2 of Pengerang, i.e. SPV1, SPV2 and SPV3, will expire in 2076F, and we have discounted cash flows until that year. All three SPVs have the option of extending their land lease for a further 34 years to 2110F, but we have not discounted cash flows for the optional 34-year period. We have assumed that SPV1 will remain largely fully utilised for the forecast period, but with no rate escalation. Similarly, we have also assumed that the Petronas group of companies will renew their leases for SPV2 and SPV3 beyond the initial 25-year contract, but that leasing rates will fall 25% in a single step-down at the 26 th year, with no further rate reductions thereafter. 57

58 Figure 29: SOP valuation of Dialog Group Berhad (RM m) - end-cy18f Cash flow forecast period Valuation Dialog's of 100% equity stake equity stake Attributable to Dialog Per share value Valuation method From To RM m % RM m RM/share Tank Terminals (RM m) 27, , A - Kertih Terminals FY00 FY60F 1, B - Langsat Terminals (B1 + B2) FY10 FY67F 1, , C - Pengerang Terminals (C1 + C2) FY14 FY76F 23, , A Kertih Terminals - Until end of 60-year land lease FY00 FY60F 1, Kertih Terminals Sdn Bhd (30% JV) - until FY30F FY00 FY30F 1, % DCF to equity Kertih Terminals Sdn Bhd (30% JV) - FY31F-FY40F FY31F FY40F % DCF to equity Kertih Terminals Sdn Bhd (30% JV) - FY41F-FY60F FY41F FY60F % DCF to equity B1 Langsat Terminals - Until end of current 30-year land FY10 FY37F 1, lease Langsat Terminal (One) Sdn Bhd (44% JV, to become 80%) FY10 FY37F % DCF to equity Langsat Terminal (Two) Sdn Bhd (44% JV, to become 80%) FY12 FY37F % DCF to equity B2 Langsat Terminals - Assuming 30-year extension of FY37F FY67F land lease Langsat Terminal (One) Sdn Bhd (44% JV, to become 80%) FY37F FY67F % DCF to equity Langsat Terminal (Two) Sdn Bhd (44% JV, to become 80%) FY37F FY67F % DCF to equity C1 Pengerang Terminals - Until end of current 65-year FY14 FY76F 21, , land lease SPV1 - Pengerang Independent Terminals S/B (46% JV) FY14 FY76F 2, % 1, DCF to equity SPV2 - Pengerang Terminals (Two) S/B (25% JV) FY19F FY76F 10, % 2, DCF to equity SPV3 - Pengerang LNG (Two) S/B (25% assoc) FY18F FY76F 7, % 1, DCF to equity C2 Pengerang Expansion - Certain and high probability 2, , SPV1 - Extra 1m cbm, FY20F onwards (46% JV) FY20F FY76F 2, % 1, DCF to equity Upstream (RM m) PSC - Dialog Resources S/B (100% sub, 20% interest in PSC) % NBV 30 Jun 2016 RSC - BC Petroleum S/B (32% JV) % NBV 31 Dec 2015 OSC - Halliburton Bayan Petroleum S/B (50% JV) % NBV 31 Dec 2015 Downstream (RM m) 3, % 3, x P/E on sustainable earnings of RM200m p.a. Note: Including EPCC, Specialist Products & Services, Plant Maintenance & Catalyst Handling Services, Fabrication, and Overseas businesses under Dialog Systems (Asia) Pte Ltd. Add: Advances from Dialog Group Bhd to JVs and associates at end-cy18f (RM m) Add: Other net assets 2, Add: Dialog Group Bhd's consolidated cash balance at end-cy18f (RM m) Less: Dialog Group Bhd's consolidated debt balance at end-cy18f (RM m) -2, Total SOP valuation of Dialog Group Berhad (RM m) - end-cy18f 12, Pengerang Long-Term Expansion FY24F FY76F 19, , SPV5 - Similar to SPV2, FY24F onwards (25% JV) FY24F FY76F 6, , DCF to equity SPV6 - Similar to SPV2, FY29F onwards (25% JV) FY29F FY76F 5, , DCF to equity SPV7 - Similar to SPV2, FY34F onwards (25% JV) FY34F FY76F 4, , DCF to equity SPV8 - Similar to SPV2, FY39F onwards (25% JV) FY39F FY76F 3, DCF to equity Total SOP valuation, including long-term Pengerang expansion (RM m) - end-cy18f 17, Number of ordinary shares (m) 5,641.6 NOTE: LAND LEASE COMMENCEMENT DATES AND TANK TERMINAL COMMERCIAL COMMENCEMENT DATES MAY BE DIFFERENT SOURCES: CIMB FORECASTS, COMPANY REPORTS 58

59 Future Pengerang expansion worth at least 85 sen/share Dialog still has plenty of land left for future development at Pengerang. Dialog will work to develop Phase 3 and beyond of the PDT in a gradual and phased manner, in our view, over a period of years. Phase 3 and additional SPVs can accommodate at least another 10m cbm of storage capacity, hence we expect total PDT storage capacity will likely be approximately 15m cbm. In our valuation of Dialog, we have assumed the following expansion to be phased in: SPV5 to contribute over 52 years from FY24F to FY76F, SPV6 to contribute over 47 years from FY29F to FY76F, SPV7 to contribute over 42 years from FY34F to FY76F, and SPV8 to contribute over 37 years from FY39F to FY76F. We have assumed that each of the SPVs above are similar in scope, land area and capex size as SPV2, and also contribute the same project IRR of 9-10% over the first 25 years of operations. We assume SPV5 will begin contributing to Dialog five years from today, i.e. FY24F, SPV6 five years after the start of SPV5, and so on. As a result, we have assumed an expansion programme that will take more than 20 years to execute, which is more conservative than Dialog s own target of years. Finally, as we have assumed that the tank storage capacity at SPV5, SPV6, SPV7 and SPV8 are the same size as SPV2 s 2.1m cbm, this means that we have assumed expansion of up to 8.4m cbm of capacity. However, in our estimate and based on Dialog s guidance, Dialog s entire PDT development can accommodate another 10.6m cbm of storage capacity, or thereabouts. Again, on the issue of capacity, we have made more conservative expansion estimates than Dialog s own target. The sum total of the DCF valuation of SPV5, SPV6, SPV7 and SPV8 is 85 sen/share, which we have added to our Dialog SOP valuation of RM2.22. We believe that the value of the future Pengerang developments ought to be included in our valuation of Dialog, since the prospects and probability of expansion are good. Upstream assets: Using 1x book value We have valued Dialog s upstream assets at only 3 sen/share, using net book value for each of the upstream companies based on the latest-available financial statements (30 June 2016 for PSC and 31 December 2015 for RSC and OSC). In reality, we believe that the upstream business is worth more, but with limited information on future production volumes, we are unable to reliably forecast cash flows and hence struggle to estimate the value of these businesses. The net book value of these businesses would be the lowest-possible valuation, since oil reserve auditors need to look at the balance sheet capitalisation of development costs annually, and impair the balance sheet carrying values if the capitalised costs are higher than the estimated realisable value of the future production flows. In any case, we believe that many investors are generally not particularly concerned about Dialog s upstream businesses, and rightfully focus on its tank terminals businesses as the cornerstone of shareholder value. As a final point, Dialog s upstream businesses continue to make profits, and add to, rather than destroy, shareholder value. In our view, the issue of how much value, is secondary. 59

60 Traditional businesses: P/E of 15x For Dialog s traditional businesses, i.e. EPCC, sale of specialist products, plant maintenance, catalyst handling and fabrication businesses, we apply a 15x P/E multiple to sustainable earnings of RM200m p.a., which contributes 53 sen/share to our Dialog target price. We are forecasting Dialog s subsidiaries to deliver sustainable annual core net profits of slightly more than RM200m p.a. (over the next years). We expect this to mainly come from Malaysian EPCC profits of around RM70m p.a., based on sustainable revenue of RM1bn annually at a 7% net profit margin, RM30m in annual profits from plant maintenance and catalyst handling services, as well as the sale of specialist products, in Malaysia, and Annual profits of some RM100m p.a. from Dialog Systems (Asia) Pte Ltd, which houses all of Dialog s diverse overseas businesses in the same segments that Dialog has presence in Malaysia. Against this sustainable profit of RM200m p.a., we have applied a target P/E multiple of 15x, which is the same multiple that our Malaysian construction analyst has applied for the construction stocks listed in Malaysia, on the basis of strong growth prospects in the industry. 60

61 OOil & Gas - Equipment & Svs Malaysia Dialog Group Bhd October 16, 2017 Sector comparison Figure 30: Sector comparison Company Bloomberg Ticker Recom. Price Target Price Market Cap Core P/E (x) 3-year EPS P/BV (x) Recurring ROE (%) EV/EBITDA (x) Dividend Yield (%) (local curr) (local curr) (US$ m) CY17F CY18F CAGR (%) CY17F CY18F CY17F CY18F CY19F CY17F CY18F CY17F CY18F Dialog Group Bhd DLG MK Add RM2.16 RM3.07 2, % % 11.7% 13.1% % 1.2% VOPAK VPK NA Not Rated , % % 12.4% 11.3% % 2.8% Tank terminals % % 12.2% 11.7% % 2.3% Bumi Armada BAB MK Add RM0.72 RM0.94 1, na % 12.2% 8.9% % 0.0% Dialog Group Bhd DLG MK Add RM2.16 RM3.07 2, % % 11.7% 13.1% % 1.2% Perisai Petroleum PPT MK Reduce RM0.05 RM na na na % -53.6% -44.3% % 0.0% Petronas Dagangan Bhd PETD MK Add RM24.28 RM , % % 17.1% 17.1% % 3.2% Sapura Energy Bhd SAPE MK Hold RM1.46 RM1.63 2,072 na % % 0.8% 0.8% % 0.7% UMW Oil & Gas UMWOG MK Hold RM0.30 RM na na na % -2.7% -3.7% % 0.0% MISC Bhd MISC MK Hold RM7.15 RM7.41 7, % % 4.6% 4.4% % 2.1% Dayang Enterprise DEHB MK Not Rated RM % % 2.7% 7.0% % 0.9% Petra Energy PENB MK Not Rated RM na 37.7 na % 2.0% 7.3% na % 3.7% Malaysia O&G players % % 5.2% 5.3% % 2.1% NOTE: AS OF 13 OCTOBER 2017 SOURCES: CIMB, BLOOMBERG 61

62 Appendices 62

63 APPENDIX 1: THE TANK TERMINAL BUSINESS An essential midstream link The tank terminals business is in the midstream portion of the oil and gas value chain. The midstream portion also includes the shipping of crude oil and refined petroleum products. The midstream value chain links the upstream part of the business (oil and gas exploration and production) with the downstream value chain (refinery operations and retail sales). As can be seen in Vopak s illustration below, tank terminals are required for the storage of crude oil prior to refining as well as the storage of refined petroleum products prior to distribution. Figure 31: Storage terminals are in the midstream segment of the oil and gas value chain SOURCE: VOPAK There are four different types of tank terminals. 1. Industrial terminals are dedicated terminals for the use of specific petrochemical companies or oil refineries. In Dialog s case, the Kertih Centralised Tankage Facilities (KCTF) and the tanks at Pengerang Terminals (Two) Sdn Bhd are dedicated industrial terminals. KCTF is dedicated for the use of the Petronas Chemicals group, while Pengerang Terminals (Two) is dedicated for the use of Petronas s RAPID refinery. Integrated oil and petrochemical companies typically have equity stakes in these industrial terminals; Petronas Chemicals has a stake in KCTF, while Petronas has a stake in the dedicated Pengerang terminals. 2. Gas terminals are for the storage of LNG/LPG feedstock, which is used for electricity generation or for other industrial uses. Dialog s facilities under Pengerang LNG (Two) Sdn Bhd are dedicated to Petronas Gas s regasification plant, which will supply gas for the industrial needs of the Pengerang Integrated Complex. 3. Distribution terminals are used in certain highly-industrialised countries that no longer operate their own domestic refineries. Hence, their demand for refined products must be met through imports, which have to be stored at the entry ports prior to distribution. Dialog does not have any exposure to this sort of terminal. 4. Hub terminals are located along major shipping routes and are frequently the point of exchange between buyers and sellers of oil products. Dialog s exposure to hub terminals includes its part-ownership of the Langsat Tank Terminals Facility (LTTF) and the independent terminals under Pengerang Independent Terminals Sdn Bhd. 63

64 Figure 32: The four different types of tank terminals SOURCE: VOPAK Sharing of common facilities. The actual tanks themselves are typically situated within a centralised tank terminal (CTT) facility, i.e. bulk storage in an enclosed area. These storage tanks share utilities and services, such as compressed air, industrial gases, power distribution, control room, laboratory, drumming, tank truck loading, waste treatment, fire-fighting and operations and maintenance services. Therefore, CTT facilities provide economies of scale, optimisation of land usage and efficient utilisation of terminal facilities with respect to common pipe racks, tankage and utilities. Onshore storage offers more flexibility than floating storage. When onshore tanks are in short supply, some oil traders or distributors employ offshore floating storage, typically on VLCCs that can store 2 mmbbl of oil. However, onshore storage offers greater flexibility to the cargo owner since onshore tanks can blend different products and independent surveying companies can perform tests more easily. 64

65 Figure 33: The key regional hubs for oil storage Key global storage hubs The world s most important oil storage terminals are located in the regional hubs of Antwerp-Rotterdam-Amsterdam (ARA), the Singapore Straits, Fujairah (UAE) and Houston (the US). These four regional hubs alone account for around 30% of global independent oil storage capacity, according to a 2014 Vopak presentation. In Singapore, most of Dialog s oil storage facilities are located on Jurong Island. The tank terminal business in Johor, Malaysia, grew out of the land capacity constraints in Singapore. Other important regions for tank terminals include China (Shanghai, Dalian, Shandong and Jiangyin), Sao Paulo (Brazil) and Hamburg (Germany). Hubs are important as they are typically situated at major shipping crossroads that have also developed into major refining centres. Given the strategic locations, the hubs are ideal places for storage, blending and for changing product specifications. This also makes them well suited as places for trading and to address the trading needs arising from intra- and inter-regional surpluses and shortages. In addition, with high volumes of trading liquidity, these hubs are ideal as price centres and locations for price discovery. Pengerang and other tank terminals located in southern Johor, as well as the tank farm located at Karimun Island, Indonesia, are part of the Singapore Straits trading and storage hub as Platts has expanded the delivery locations of free on board (FOB) Singapore pricing benchmarks to include the Johor and Indonesian delivery points. SOURCE: VOPAK Demand for tank terminal storage Demand for tank terminal storage can come from three main sources, i.e. industrial users, product distributors that facilitate global trade and speculative trading arising from inter-regional arbitrage opportunities or the steepening of the oil price forward curve. 1. Industrial demand Industrial users, such as upstream oil and gas companies, oil refineries, petrochemical plants and LNG liquefaction/regasification plants, require tank terminals to store their feedstock and/or output. This is the most common use for the tanks. Demand for industrial tank storage will increase when additional industrial capacity is planted, for instance, when Petronas s new RAPID refinery is opened in Pengerang in 2019F. 65

66 While the industrial users may invest in their own tank terminals, there are also strong incentives to use third-party, independently-owned tank terminals. This is because industrial users need to focus their capex on critically-important core operations in the upstream or downstream segments. In addition, the downstream segment of tank terminals and shipping capex are no longer considered to be critical investments, particularly in a low-oil price environment. Furthermore, industrial users are attracted to independent operators that have access to the latest technology for efficient tank terminal operations and can leverage their global operations to ensure economies of scale in the construction and operation of the tank terminals. The growth in industrial demand for oil is directly correlated to the growth of the Asian economies. According to IHS, there is also expected to be growing global demand for plastics (see charts below) and, hence, greater demand for petrochemicals. Figure 34: Global ethylene capacity growth (m tonnes) Figure 35: Global plastics usage per capita (kg/capita) SOURCE: VOPAK, IHS SOURCE: VOPAK, IHS 2. Trade and distribution demand Oil, gas and petrochemical product distributors also need storage tanks to facilitate the trade of products from regions of surplus production to regions with deficits. The storage tanks are used to store products in the regions of surplus production prior to export and in deficit regions to store products once they are imported but prior to actual distribution. Singapore, for instance, is a major regional storage and distribution hub; the country stores oil imported from the Middle East and West Africa via large VLCC shipping tankers that can transport more than 2 mmbbl of oil and then re-exports the refined oil products to the Far East in smaller parcels via aframax-sized LR2 clean petroleum tankers with capacity to transport 0.5 mmbbl of oil. Long-term demand for tank terminals is underpinned by growing market imbalances, with the Middle East, Former Soviet Union (FSU) countries and North America expected to accumulate greater surpluses of oil and gas products, while Europe and Asia Pacific are expected to see larger deficits by 2026F, according to Wood Mackenzie. This is expected to promote greater inter-regional trade. Tank terminal operator VTTI said that the oil industry has occupied at least 2m cbm of storage space in Singapore, Malaysia and Indonesia since early-2015 to October 2016 following record product exports from China and a build-up in diesel supplies. This was driven by China loosening restrictions on oil imports, leading to teapot refineries increasing utilisation and channelling the excess output to export markets. This subsequently led to the teapot refineries looking for tank terminal storage, especially for distillate tanks to store clean petroleum products. 66

67 Figure 36: Imbalances of petroleum products worldwide means that there is a growing need for efficient hub functions and import/distribution type facilities SOURCE: VOPAK, WOOD MACKENZIE 3. Speculative demand Traders also require tank terminal storage capacity to facilitate speculative trading. Speculative opportunities may arise when the forward price of oil moves into an upward-sloping contango, i.e. when the price of oil in the future is more than the price of oil today. The steeper the contango, the more profitable the trading opportunity becomes, since the speculator can purchase oil immediately at a low spot price and concurrently enter into a futures contract to sell the oil at a fixed future price. As long as the future-spot price gap is large enough, the profits from the trade will be sufficient to cover the cost of storing the oil for that duration of time and for the cost of transport, insurance and working capital. Demand for storage in these instances may materialise in the form of demand for onshore storage or even floating storage on VLCC tankers, if the period charter rates for the VLCCs are lower than the cost to store onshore (VLCC charter rates can fluctuate materially depending on the availability of VLCC supply) or if onshore storage capacity is already fully utilised. Conversely, when the oil price forward curve flattens or even enters backwardation (when the spot price is higher than the futures price), speculative demand disappears since the future-spot price gap is insufficient to cover the cost of interim storage. Trading and storage opportunities may also arise when arbitrage prospects open. For instance, if demand for diesel increases in Europe due to refinery outages, the price of diesel increases in Europe relative to lower prices in the US, thus encouraging the movement of diesel to Europe and increasing the demand for diesel storage in the continent. As such, speculative demand for oil storage fluctuates depending on the oil price forward curve and on inter-regional pricing arbitrage and is one of the main reasons why tank terminal utilisation moves up or down from time to time. 67

68 Figure 37: Singapore Straits: Oil terminal capacity developments (cbm) Major independent tank terminal (ITT) operators Major ITT operators include Netherlands-based Vopak, the world s largest player, and Germany-based Oiltanking, the world s second-largest player. Vopak has a significant presence in the Straits of Malacca region, simply known as the Straits or Singapore Straits, i.e. in Singapore and Malaysia, as explained in this YouTube video. Vopak is a key equity partner for Dialog s tank terminal facilities with a 30% stake in the Kertih Centralised Tankage Facilities, a 44% stake in Pengerang Independent Terminals Sdn Bhd and a 25% stake in Pengerang Terminals (Two) Sdn Bhd. Vopak is listed on Euronext Amsterdam (Bloomberg code: VPK NA). ITT operators serve the storage needs of international producers, buyers, distributors and traders of crude oil, refined products, edible oils, chemicals, petrochemicals and gas. ITT operators do not own the products stored in the tanks and do not take proprietary trading positions. We estimate that ITT operators control around 60% of global tank terminals capacity. Other tank terminal operators have links to global oil traders, such as Vitol s VTTI. MISC Bhd purchased a 50% stake in VTTI in May 2010 but sold it in August VTTI has a 100% stake in ATT Tanjung Bin Sdn Bhd, located adjacent to the Port of Tanjung Pelepas. Another oil trader, Trafigura, owns tank terminal facilities in Malaysia, namely a 20% stake in the Langsat terminals in southern Johor. Oil trader, Gunvor Group, has an equity stake in the Oiltanking Karimun terminal at Karimun Island, Indonesia. SOURCE: VOPAK 68

69 Figure 38: Sources of revenue for tank terminal operators Revenue model for tank terminals Tank terminals earn revenue through three main sources: 1. Storage fees, which are akin to rental paid for the storage of crude oil, refined petroleum products, chemicals and petrochemicals in various tanks. 2. Throughput fees, which are fees paid for the movement of the stored products from the tanks via pipeline to other tanks or to berthed shipping tankers. 3. Ancillary service fees, which include fees paid for services, such as mixing, blending and heating of the products stored in the tanks. Storage fees typically account for 75% of total tank terminal revenues, throughput fees comprise 20% and ancillary service fees constitute the remaining 5%. Storage fees are determined by the strategic location of the facility and the demand-supply balance in that particular region. Storage fees do not have any correlation whatsoever to the price of crude oil. SOURCE: VOPAK 69

70 Figure 39: Occupancy rates of Vopak s terminals globally Global tank terminal occupancy rates expected to moderate Occupancy rates of Vopak s terminals took a step up in as a result of the aggressive OPEC oil production increases that exceeded global oil demand, and the low oil prices that stimulated refining activity and increased the demand for the storage of refined products. However, utilisation or occupancy rates at Vopak s terminals appeared to fall over the past four quarters and Vopak has guided for an average utilisation of 90% for 2017F, which is 3% pts lower than the 93% seen in This is likely due to the capacity increases that Vopak has commissioned and also because of the OPEC and non-opec oil production cuts that took effect on 1 January 2017, which has led to some degree of inventory destocking across the globe. SOURCE: VOPAK Figure 40: Vopak s Netherlands terminals utilisation rate (%) Figure 41: Vopak s Netherlands terminals capacity (m cbm) SOURCE: VOPAK SOURCE: VOPAK Figure 42: Vopak s Europe, Middle East and Africa terminals utilisation rate (%) Figure 43: Vopak s Europe, Middle East and Africa terminals capacity (m cbm) SOURCE: VOPAK SOURCE: VOPAK 70

71 Figure 44: Vopak s Asia terminals utilisation rate (%) Figure 45: Vopak s Asia terminals capacity (m cbm) SOURCE: VOPAK SOURCE: VOPAK Figure 46: Vopak s Americas terminals utilisation rate (%) Figure 47: Vopak s Americas terminals capacity (m cbm) SOURCE: VOPAK SOURCE: VOPAK 71

72 APPENDIX 2: TANK TERMINALS IN THE SINGAPORE STRAITS REGION Singapore is the pioneer and Malaysia is the up-and-comer In Southeast Asia, Singapore was one of the earliest countries to establish an oil refining and petrochemical industry, as well as to position itself as a bunker hub. The Singapore government took advantage of its strategic geographical position at the mouth of the Straits of Malacca, which serves as a major transit route for oil tankers heading to East Asia from the Middle East. Directly and indirectly, this has led to Singapore s establishment as a premier oil storage and tank terminal hub in the region. Most of this tank terminal capacity is concentrated on Jurong Island, which is formed by the amalgamation, via land reclamation efforts, of seven islands offshore the southwest corner of the main island of Singapore. Because Jurong Island houses two oil refineries (the ExxonMobil refinery and the refinery of the Singapore Refining Company) and a concentration of many petrochemical plants, the entire island has turned into a valuable oil product and petrochemical trading hub, enabling over-the-fence buying and selling, as it were, which attracts even more petrochemical plants to be based on Jurong Island. This has become a very powerful economic reason to build and base tank terminals on the island, out of both necessity and for commercial purposes. Singapore s first-mover advantage has enabled it to remain at the forefront of the Asian oil trading and storage industry for more than twenty years. However, further expansion is becoming more difficult and far more expensive. The last major tank terminal to be opened in Singapore was the Universal Terminal on Jurong Island, which commenced operations in January 2008 with storage capacity of 2.33m cbm. This is currently the single-largest tank farm in Singapore. However, since then, Singapore has encountered physical constraints in its attempt to expand its tank terminals business. Additionally, according to a 2014 report from the International Energy Agency (IEA), Recent government legislation has reportedly sought to prohibit the allocation of land to new oil terminals, while prioritising the construction of high-value assets such as petrochemical facilities. Figure 48: Major industrial oil tank terminals in the Singapore Straits region note that the Batam Island terminal has not yet materialised Jurong Island Busing Island Sebarok Island SOURCE: CIMB, PLATTS 72

73 As a result of these physical land constraints, Singapore has had to find creative solutions to expand its storage capacity. In September 2014, Singapore inaugurated one of its most ambitious ventures, the first phase of the Jurong Rock Caverns (JRC) underground storage project. Located 400m below the Banyan Basin off Jurong Island, JRC has capacity to store 1.47m cbm of crude oil and condensates. The underground rock caverns are expensive to construct and hence, have expensive leasing rates. Naturally, they will not be the first choice for oil traders and distributors in the Singapore Straits. Another limitation is that the JRC can only store crude oil and crude condensates, but cannot store petroleum products, which is what Singapore needs most. Despite the physical constraints in Singapore, further expansion in tank storage capacity in the Singapore Straits region is absolutely critical given the growth in the volume of product demand expected from Asia over the medium term. It is also key to the city-state maintaining its position as one of the preeminent Asian oil trading and distribution hubs in the decades ahead. Malaysia enters the game This critical necessity has led to the setting up of other tank terminals in the region, particularly in Malaysia. In the Southern state of Johor, several tank terminals have opened up in order to capture overflow business from Jurong Island. Phase 1 of the Langsat tank terminals commenced operations in September In April 2012, the first phase of the Tanjung Bin tank terminals was commissioned, and the first phase of the Pengerang terminals began operations on 12 April Incremental expansion is possible at Tanjung Bin and Langsat but their attractiveness is constrained by their limited port draft. On the other hand, Pengerang has significant amounts of land left for development, as well as a very deep draft. Hence, we expect Pengerang to be the most important tank terminal facility in Malaysia over the next decade. Over the next 3-5 years, the Tanjung Piai and Asia Petroleum Hub (APH) tank terminal projects may also be commissioned, promising to add millions more cbm of tank terminal capacity to the Malaysian side of the Singapore Straits. On a separate note, the port of Pasir Gudang traditionally has about 20,600 cbm of tank storage capacity but most of this is used for the storage and trading of crude palm oil. Hence, we exclude Pasir Gudang from our discussion here about crude oil and oil product storage. Indonesia struggles with its attempt On the Indonesian section of the Singapore Straits, the Oiltanking Karimun terminals opened in 2016 with modest capacity. Sinopec was also supposed to embark on its West Point Terminal project on Batam Island but this was delayed due to a corruption scandal. It appears that project execution in Indonesia has not been as smooth as in Malaysia. Hence, we do not expect Indonesia to be a significant threat to Singapore as the incumbent of the tank terminals business, or to Malaysia, which is the up-and-comer. Summary Singapore is clearly the giant in the tank terminals business in the Singapore Straits as it currently has 13.1m cbm of independent tank terminal capacity and another 10.5m cbm of industrial tank terminal capacity. As mentioned earlier, independent tank terminals are those that are available for third-party charterers, while industrial tank terminals are dedicated to specific refineries or petrochemical plants. While Malaysia is currently significantly below Singapore s ranking in terms of total tank terminal capacity, it has projects that are under development and projects in the pipeline that may catapult it to the top position in the Singapore 73

74 Straits, assuming everything is executed according to plan. Based on information available to date, Indonesia will be in a distant third position even if all of its announced projects are executed smoothly. Figure 49: Independent tank terminal capacity in the Singapore Straits (cbm) Existing Under development Potential Total Singapore 13,082, ,000 1,900,000 15,182,093 Malaysia 3,102,000 1,000,000 18,060,000 22,162,000 Indonesia 760,000 3,130, ,890,000 Total 16,944,093 4,330,000 19,960,000 41,234,093 SOURCE: CIMB RESEARCH, COMPANY REPORTS, PLATTS Figure 50: Industrial tank terminal capacity in the Singapore Straits (cbm) Existing Under development Potential Total Singapore 10,484, ,484,762 Malaysia 0 2,100,000 10,600,000 12,700,000 Indonesia Total 10,484,762 2,100,000 10,600,000 23,184,762 SOURCE: CIMB RESEARCH, COMPANY REPORTS, PLATTS 74

75 Tank terminals in Singapore Singapore has many independent tank terminals spread across many of the islands located southwest of the main island. The terminals are primarily concentrated on Jurong Island but are also on Busing Island, Bukom Island and Sebarok Island. Several tank terminals are conjoined with power stations like Senoko Power (Unlisted), Tuas Power (Unlisted) and Power Seraya [Part of YTL Power International (YTLP MK, Add, TP: RM1.80)]. These power stations primarily use gas to generate electricity but have oil tanks that are used as a secondary, back-up source of fuel in the event of gas supply issues. The surplus capacity of these oil tanks is leased out to third-party users and the volume of surplus capacity fluctuates depending on the individual station s needs. The single-largest independent tank terminal in Singapore is Universal Terminal, which has 2.33m cbm of storage capacity located on Jurong Island. This is followed by Tankstore s 2m cbm located on Busing Island. Apart from these two terminals, all other independent terminals in Singapore have capacity of less than 2m cbm. Five independent terminals have capacity of between 1m and 1.5m cbm each, two terminals have capacity of between 0.5m and 1m cbm each and two more terminals have capacity of less than 0.5m cbm each. This is excluding industrial terminals. Many of the Jurong Island tank terminals are not linked by pipeline to each other as they were built years ago. The tank terminals are also owned by different entities that may be in competition with each other. As a result, oil traders operating a 105,000 dwt LR2 clean petroleum tanker seeking to lift several parcels of products to fill up the ship may need to berth and unberth several times at different terminals, leading to port congestion, delays and often demurrage fees paid to the vessel owner. There are only three tank terminals in Singapore than can accommodate VLCCs, i.e. Oiltanking Helios, Universal Terminal and Tankstore on Busing Island. In Malaysia, the massive Pengerang Deepwater Terminal (PDT) development under Dialog, as well as the Tanjung Piai Maritime Industrial Park (TPMIP) development under Benalec Holdings Bhd (BHB MK, Not Rated) will be able to berth VLCCs and provide a strong alternative to Singapore s offerings. There are many challenges that may constrain the future growth of Singapore s tank storage business, as follows: 1. There is an increasing scarcity of land in Singapore. In 2014, the Singapore government sought to prohibit the allocation of land to new oil terminals while prioritising the construction of high-value assets such as petrochemical facilities, according to the International Energy Agency (IEA). 2. The land on Jurong Island upon which the tank terminals sit, is on 30-year leases and the first-generation tank terminals in Singapore were built 20 years ago. There is a possibility that the Singapore government may not renew the leases after they expire so it can reallocate the land to build new petrochemical plants, which add greater economic value to the Singapore economy. 3. The cost of building tank terminals in Singapore is also higher than in Malaysia. According to a Wall Street Journal article on 23 January 2014 that quoted industry sources, every 1m cbm of onshore storage in Singapore costs up to US$400m to build or RM1.7m per million cbm at today s exchange rates. This is higher than Dialog s approximate capex cost of RM1.3m per million cbm at SPV1 based on its fully built-up capacity of 2.3m cbm. 4. Without sufficient land, tank terminals in Singapore are moving underground, with the first being the Jurong Rock Caverns. However, the caverns can only be used to store crude oil and crude condensate, rather than the petroleum products that form the larger pool of storage demand. Blending services cannot be done in the caverns. As the cost of leasing the caverns for storage is very high, the utilisation of the caverns is only approximately half today. There are also technical issues like water 75

76 seepage into the caverns, which results in extra cost once the crude oil is uplifted from the caverns as the water needs to be removed prior to refining. Figure 51: Singapore s tank terminals as at August 2014 ( commercial means independent tank terminals that are open for third-party lease, non-commercial means industrial or dedicated tank terminals) SOURCE: PLATTS 76

77 Figure 52: Singapore s current tank terminals (commercial or independent tank terminals that are open for third-party lease are marked in white boxes, non-commercial / industrial / dedicated tank terminals are marked in yellow boxes) Vopak Banyan ExxonMobil refineries Singapore Refining Company Power Seraya Jurong Port Tank Terminals Chevron refinery Oiltanking Singapore Horizon Singapore Shell Bukom Universal Terminal Tankstore Helios Singapore Singapore Petroleum Company Vopak Sebarok SOURCE: GOOGLE MAPS, CIMB RESEARCH 77

78 Figure 53: Independent oil tank terminals in the Singapore Straits Singapore Name of tank terminal Current capacity Senoko Power Tuas Power Location Southwest of main Singapore island Capacity (cbm) Horizon Singapore Jurong Island 1,252,184 Vopak Banyan Jurong Island 1,449,763 Oiltanking Seraya Jurong Island 1,265,000 Types of storage tanks Owners Notes 420,000 Petroleum products 24 fuel oil tanks, 35 tanks for light and middle distillates 112 tanks for petroleum products, chemicals, base oil, gases, LPG 80 tanks for gasoline, gasoil, heavy fuel oil, naphtha, feedstocks, components, and jet fuel Huaneng Power International Inc Power Seraya Jurong Island 870,000 Gasoil, jet fuel and fuel oil PowerSeraya (100% YTL Power International) Helios Terminal Oiltanking Helios Jurong Island 503, fuel oil tanks Corporation Pte Ltd (55% Oiltanking GmbH, 45% Macquarie Capital) Universal Terminal (S) Universal Terminal Jurong Island 2,330, petroleum product tanks Pte Ltd (65% Hin Leong Trading Pte Ltd, 35% Tankstore Busing Island 2,000,000 Vopak Sebarok Sebarok Island 1,262,146 Jurong Rock Caverns - Phase 1 North of main Singapore island Jurong Island 1,470,000 Subtotal current capacity 13,082, ,000 7 diesel storage tanks 112 tanks for petroleum and petrochemical products 79 tanks for petroleum products and chemical blendstock 5 caverns ranging from 150,000 cbm to 330,000 cbm each, for the storage of crude and condensates Senoko Energy Pte Ltd (consortium led by Marubeni Corporation, et al) PetroChina) Horizon Singapore Terminals Pte Ltd (52% ENOC Group, et al) Vopak Terminals Singapore Pte Ltd (69.5% Vopak, et al) Oiltanking Singapore Limited (55% Oiltanking GmbH, 45% 3i Infrastructure Limited) Vopak Terminals Singapore Pte Ltd (69.5% Vopak, et al) Jurong Town Corporation (100%) Senoko Power s tanks are primarily used for its own requirements for oil as a back-up fuel for power generation (gas is main source of fuel), hence availability of the tanks fluctuates depending on station s needs. 1 berth of 12m draft Tuas Power burns oil as well as natural gas for power generation, hence availability of the tanks fluctuates depending on station s needs. 4 berths capable of handling vessels of up to suezmax size 7 berths:, 1 x 24.5m draft, 5 x 18.3m draft, 1 x 14.7m draft Largest single tank farm in Jurong Island, opened in Jan berths: 4 x 23m draft for fully-laden VLCCs, 4 x 17.7m draft, 1 x 18.7m draft, 6 x 10-11m draft, 4 berths of 16.5m draft 7 berths of 15.5m draft 5 deepwater berths and 6 barge berths: 4 x 15-16m draft, 4 x 14-15m draft, 1 x 13-14m draft, 2 x 12-13m draft Unclear 12 berths that can handle vessels up to 236,000 SDWT 9 berths of 17.6m draft Underground storage caverns officially opened in Sep Phase 1A: 2 caverns 480,000 cbm, Phase 1B: 3 caverns 990,000 cbm. 1 berth of 15.5m draft. 15-year concession to operate awarded to Banyan Caverns Storage Services Pte Ltd, a consortium comprising Vopak Terminals Singapore Pte Ltd (45%), Geostock SAS (35%) and Jurong Consultants Pte Ltd (20%). Ongoing developments Jurong Port Jurong Port 200,000 Subtotal ongoing developments 200,000 Clean petroleum products and chemicals Jurong Port Tank Terminals (60% Jurong Port, 40% Oiltanking Singapore) Expected to be ready by 2019F. initial capacity of 200,000 cbm, potential to add 280,000 cbm; total capacity 480,000 cbm. 4 berths with draft of m, capable of berthing vessels up to 180,000 dwt. Future developments Jurong Port Jurong Port 280,000 Jurong Rock Caverns - Phase 2 Very Large Floating Structure (VLFS) Subtotal future developments Clean petroleum products and chemicals Jurong Island 1,320,000 Crude oil and condensates Jurong Island 300,000 1,900,000 Crude oil and clean petroleum products Jurong Port Tank Terminals (60% Jurong Port, 40% Oiltanking Singapore) Jurong Town Corporation (100%) Unknown Phase 2 has potential to add 280,000 cbm to Phase 1 s initial capacity of 200,000 cbm; total capacity 480,000 cbm. Timing of building and commissioning is unknown, as still under consideration by JTC. Each VLFS can accommodate 300,000 cbm of storage space. Timing of building and commissioning is unknown. Grand Total 15,182,093 SOURCE: CIMB RESEARCH, COMPANY REPORTS, PLATTS 78

79 Figure 54: Industrial oil tank terminals in the Singapore Straits Singapore Name of tank terminal Location Capacity (cbm) Types of storage tanks Owners Notes Current capacity ExxonMobil Pioneer Road ExxonMobil Jurong Island Jurong Island 1,700,000 Chevron Jurong, on main island of Singapore Tanjung Penjuru, on main island of Singapore 2,310, ,000 Singapore Refining Company Jurong Island 1,904,762 Shell Bukom Bukom Island 3,900,000 Crude oil and petroleum products Fuel oil and other petroleum products Crude oil and petroleum products Crude oil and petroleum products ExxonMobil Chevron 50% Chevron, 50% Singapore Petroleum Company (PetroChina) Royal Dutch Shell Nameplate refining capacity of 592,000 bpd of crude. Mobil started its refinery in Jurong (Pioneer Road) in 1966, while Esso started up at Pulau Ayer Chawan (now part of Jurong Island) in Pipelines connect the two integrated sites to enable seamless operations and effective molecule management. Tanks for the storage of fuel oil and other petroleum products. Nameplate refining capacity of 290,000 bpd of crude. Nameplate refining capacity of 500,000 bpd of crude. Singapore Petroleum Company Sebarok Island 220,000 Crude oil and petroleum products PetroChina SPC s storage terminal at Pulau Sebarok supports its marine bunker operations and trading. The 13 storage tanks store marine bunker, fuel oil, gas oil and jet fuel. Total 10,484,762 SOURCE: CIMB RESEARCH, COMPANY REPORTS, PLATTS 79

80 Tank terminals in Indonesia Figure 55: Independent oil tank terminals in the Singapore Straits Indonesia Indonesia is a smaller player in the tank terminal business in the Singapore Straits, with country-specific issues reportedly hobbling further development. The one and only independent tank terminal to have taken off is the Oiltanking Karimun terminal, which has capacity to store 0.76m cbm of crude oil and petroleum products. It is located on the Western shore of Karimun Island, Southwest of Singapore, and was commissioned in June Name of tank terminal Current capacity Location Capacity (cbm) Types of storage tanks Owners Notes Oiltanking Karimun Riau Islands, Southwest of Singapore 760,000 PT Oiltanking Karimun (Oiltanking GmbH holds Crude oil and petroleum >60% stake, Gunvor products Group and an Indonesian shareholder have minority stakes) Commissioned Jun berths: 1 x 320,000 mt (including VLCCs), 1 x 120,000 mt, 1 x 75,000 mt, 1 x 15,000 mt. Oil trader Gunvor has committee to the majority of the capacity at Karimun. From 3 Jul 2017, Platts included the Karimun terminal into the Platts' Singapore price assessment process. Subtotal current capacity 760,000 Future developments Oiltanking Karimun West Point Terminal Subtotal future developments Riau Islands, Southwest of Singapore Batam Island, Southeast of Singapore 500,000 Petroleum products 2,630,000 3,130, m cbm crude, 730,000 cbm clean petroleum products PT Oiltanking Karimun (Oiltanking GmbH holds >60% stake, Gunvor Group and an Indonesian shareholder have minority stakes) PT West Point Terminal (95% Sinopec Kantons Holdings, 5% PT Mas Capital Trust) Sufficient land adjacent to the current Karimun tank terminal to accommodate an additional 500,000 cbm in the future. Capex cost estimated at US$840m; construction not yet started. Sinopec originally targeted opening in mid-2016, but In June 2015, delayed opening by 3-5 years due to slow demand for tank space. 9 berths: 1 x 300,000 mt, 1 x 150,000 mt, 2 x100,000 mt, 1 x 20,000 mt, 3 x 10,000 mt, 1 x 5,000 mt. Grand Total 3,890,000 SOURCE: CIMB RESEARCH, COMPANY REPORTS, PLATTS Oiltanking Karimun Back in June 2013, Oiltanking GmbH and Gunvor Group announced the construction of a greenfield terminal, Oiltanking Karimun, on the island of Karimun, Indonesia. Oiltanking GmbH is based in Germany and is the secondlargest independent tank storage provider for petroleum products, chemicals and gases worldwide. Gunvor Group is one of the world s largest independent commodities-trading houses. The facility has an initial petroleum storage capacity of 0.76m cbm. The island of Karimun was selected due to its proximity to Jurong Island. The terminal was originally expected to be operational by 2Q15 but this was delayed until June In June 2016, Oiltanking in a JV with Gunvor Group finally commissioned the new terminal. Oiltanking has a more than 60% stake in the US$270m Karimun storage facility, with Gunvor and an Indonesian firm holding the rest. The 0.76m cbm facility can store and handle the full range of clean petroleum products, as well as fuel oil. Half of the tanks will be set aside for heavy products, such as fuel oil, with the rest holding clean oil products. A substantial portion of the space will be leased by Gunvor. The terminal has four VLCC-capable deepwater berths. Additionally, ready-tobuild land means further expansion of an additional 0.5m cbm is a possibility in the future. Beginning 3 July 2017, S&P Global Platts reflected deliveries from Indonesia's Oiltanking Karimun Terminal in its Singapore pricing assessments for gasoil, jet 80

81 fuel and gasoline. This was the first Indonesian delivery point in Platts's Singapore assessment process and was in addition to approved loading points outside of Singapore, such as Malaysia's Tanjung Langsat, Tanjung Bin and Pengerang. West Point Terminal The West Point Terminal project on Batam Island is 95%-owned by China s Sinopec (SNP US, Not Rated), with the remaining 5% held by PT Mas Capital Trust (Unlisted). Sinopec originally targeted opening in mid-2016 but, in June 2015, Sinopec announced that it will delay the opening by 3-5 years due to slow demand for tank space. The original plan was to plant 2.63m cbm of tank storage capacity on Batam Island for crude oil and clean petroleum products. On 21 March 2017, Reuters reported the Indonesian police as saying that Interpol had issued red notices, the closest to an international arrest warrant, for three Chinese executives suspected of fraud linked to a more than US$800m Sinopec oil terminal development in Indonesia and that they were suspects in the alleged embezzlement of an undisclosed sum of money from the West Point Terminal project. PT Mas Capital Trust had apparently reported suspicions of fraud in the project to local police in To date, there has been no additional news on the West Point Terminal project and we are unclear whether it will proceed. Figure 56: Location of Oiltanking Karimun terminal and the proposed West Point Terminal on Batam Island Oiltanking Karimun West Point Terminal SOURCE: GOOGLE MAPS, CIMB RESEARCH 81

82 Tank terminals in Malaysia Tank terminals in the state of Johor, Malaysia, began as response to the commercial opportunities arising from the congestion at Singapore s Jurong Island. The first independent terminal to get off the ground was Phase 1 of the Langsat terminals, which commenced operations in September 2009 with global energy trader Trafigura as the main user. The Tanjung Bin tank terminals came just three years later, commissioned in April 2012, with global commodities trader Vitol as the main user. Two years later in April 2014, the first phase of the Pengerang terminals was inaugurated. The Malaysian sector of the Singapore Straits currently has 3.1m cbm of tank terminal storage capacity, far below Singapore s 13.1m cbm of capacity, but there is much potential, in our view. Dialog is planning to expand the first phase of its Pengerang terminals called Pengerang Independent Terminals Sdn Bhd from 1.3m cbm to 2.3m cbm. The first part of this 1m cbm expansion was announced by Vopak (its 44% shareholder) on 18 August 2017 and will start with the progressive commissioning of 430,000 cbm from 1QCY19F. Incremental expansion is also possible at Tanjung Bin (+0.55m cbm) and Langsat (+0.38m cbm), although their attractiveness to users is constrained by their limited port draft, which ranges from 13m to 17.5m and only able to comfortably accommodate aframaxes and half-laden VLCCs. Over the next 3-5 years, the Tanjung Piai Maritime Industrial Park (TPMIP) and Asia Petroleum Hub (APH) independent tank terminal projects may also be commissioned. The first 100 acres in Phase 1 of the TPMIP should be ready for topside construction by 1QCY18F but, more importantly, Benalec as the main project owner appears to be working towards signing an agreement with an independent tank terminal operator to take a majority stake in the project, as well as with a long-term off-taker for the initial terminal capacity of 1.13m cbm, which may be in place by end-2019f. A further 7m cbm of tank terminals can be built on the remaining acreage of Phase 1 of TPMIP once the land has been reclaimed, while at least 8m cbm can be built on Phase 2, again if the land reclamation proceeds as planned. As for the APH project, it was recently revived, with the EPC contract for the construction of the tank terminals awarded to China Railway Engineering Corporation (CREC, Unlisted). The APH is expected to have a capacity of 1m cbm once fully constructed. Altogether, if all proposed projects in the Malaysia sector of the Singapore Straits are constructed, there will be additional 18.1m cbm of independent tank storage capacity, taking the total to 22.2m cbm, which will be more than Singapore s potential for up to 15.2m cbm of capacity. 82

83 Figure 57: Independent oil tank terminals in the Singapore Straits Malaysia Name of tank terminal Current capacity Tanjung Bin Phases 1 and 2 Langsat Terminal One Location Capacity (cbm) Langsat Terminal Two 171,000 Pengerang Independent Terminal Southwest coast of Johor Southeast coast of Johor Southeast coast of Johor 1,155, ,000 1,300,000 Types of storage tanks Owners Notes 53 tanks for petroleum products 32 tanks for petroleum products 10 tanks for petroleum products 57 tanks for crude oil and petroleum products ATT Tanjung Bin Sdn Bhd (100% VTTI) Langsat Terminal (One) Sdn Bhd (Dialog 80%, Trafigura 20%) Langsat Terminal (Two) Sdn Bhd (Dialog 80%, Trafigura 20%) Pengerang Independent Terminals Sdn Bhd (46% Dialog, 44% Vopak, 10% Johor State) Phase 1 commissioned Apr 2012, comprises 41 tanks (893,000 cbm). Phase 2 opened Aug 2015, comprises 12 tanks (262,000 cbm). 6 berths with a maximum 17.5m draft, can receive partially-laden VLCCs. Phase 1 commissioned Sep 2009 Phase 2 commissioned Apr 2010 Phase 3 commissioned Aug liquid berths with draft of 13-15m. Langsat Port failed to dredge to 16.5m, as agreed with the tank terminal owners. Commissioned Dec 2011 Commissioned from Apr 2014 to Mar berths of 24m draft. Subtotal current capacity 3,102,000 Ongoing developments Pengerang Independent Terminal expansion part 1 Pengerang Independent Terminal expansion part 2 Subtotal ongoing developments Southeast coast of Johor 430, ,000 1,000, tanks for clean petroleum products Crude oil and petroleum products Pengerang Independent Terminals Sdn Bhd (46% Dialog, 44% Vopak, 10% Johor State) To be commissioned progressively from 1Q19F; Adding 1 berth of 24m draft for a total of 6 berths. Almost certain to be constructed by 2020F. Future developments Tanjung Piai Maritime Industrial Park Phase 1, near future Tanjung Piai Maritime Industrial Park Phase 1, further ahead Tanjung Piai Maritime Industrial Park Phase 2, further ahead Asia Petroleum Hub Southwest coast of Johor Southwest coast of Johor 1,130,000 7,000,000 8,000,000 1,000,000 Petroleum products only Petroleum products and petrochemicals 53 tanks storing petroleum products Spektrum Kukuh Sdn Bhd is the owner of the reclaimed land (70% Benalec, 30% Johor crown prince Tunku Ismail Idris Sultan Ibrahim and Daing A. Malek Daing A. Rahaman). Benalec will enter into a new JV with an independent tank terminal operator that may take a majority stake in the tank terminal facility. Smart Crest Sdn Bhd, JV partners unknown Tanjung Piai reclamation 3,485 areas, with Phase 1 s 1,080 acres earmarked for tank terminals. 13 berths of 24-30m draft. Spektrum Kukuh is undertaking the land reclamation works, and intends to enter into partnership with independent tank terminal operators to develop the tanks. The entire 1,080 acres of Phase 1 will accommodate around 8m cbm of tank terminal capacity, which is targeted to be built up over a period of 15 years. The target is to plant the first 1.13m cbm by end- 2019F, with another 7m cbm to be planted further ahead. Phase 2 will have a land area of 1,008 acres, and could accommodate more than 8m cbm, depending on whether the land is also used to house petrochemical plants. 100 acres of reclaimed land. 7 berths (on two jetties) with 17.5m draft capable of handling suezmaxes (150,000 dwt), 1 single-buoy mooring system for UL/VLCCs. Langsat Terminal 3 Southeast coast of Johor 380,000 Petroleum products Langsat Terminal (Three) Sdn Bhd (Dialog 80%, Trafigura 20%) On 6 Oct 2011, Centralised Terminals Sdn Bhd entered into a shareholders agreement with China Aviation Oil (Singapore) Corporation Ltd to develop a 380,000 cbm oil storage tank terminal facility. The agreement lapsed on 20 Aug 2012, and this project did not take off. Tanjung Bin Phase 3 Subtotal future developments Southwest coast of Johor 550,000 18,060,000 Crude oil and petroleum products ATT Tanjung Bin Sdn Bhd (100% VTTI) No news if Phase3 will be constructed. 4 additional jetties may be built. Grand Total 22,162,000 SOURCE: CIMB RESEARCH, COMPANY REPORTS, PLATTS 83

84 Figure 58: Industrial oil tank terminals in the Singapore Straits Malaysia Name of tank terminal Ongoing developments Pengerang Deepwater Terminal Phase 2 Subtotal ongoing developments Location Southeast coast of Johor Capacity (cbm) 2,100,000 2,100,000 Types of storage tanks Owners Notes 66 tanks for crude oil, petroleum products, and petrochemicals Pengerang Terminals (Two) Sdn Bhd (40% Petronas, 25% Dialog, 25% Vopak, 10% Johor State) Expected to be commissioned between 1QCY19F and 3QCY19F. 12 berths of 24m draft. Dedicated for the use of Petronas RAPID refinery and Petronas Chemicals petrochemical plants. Future developments Pengerang Deepwater Terminal (PDT) Subtotal future developments Southeast coast of Johor 10,600,000 10,600,000 Crude oil and petroleum products Exact ownership structure is dependent on the anchor tenants, but Dialog is expected to have a minority stake. The entire PDT development is able to accommodate a total of 5 jetties, each sufficient to accommodate movements for 3m cbm of storage, or 15m cbm in total. Dialog is planning to focus on the industrial model for the remaining undeveloped capacity at PDT. Grand Total 12,700,000 SOURCE: CIMB RESEARCH, COMPANY REPORTS, PLATTS 84

85 Figure 59: Bird s eye view of the Tanjung Langsat port The Langsat Tank Terminal Facilities (LTTF) The first project off the block in the Malaysian sector of the Singapore Straits was the Langsat Tank Terminal Facilities (LTTF). On 12 April 2007, Dialog announced that it had secured a 30-year concession from Tanjung Langsat Port Sdn Bhd to develop a centralised tank terminal facility at the port. Tanjung Langsat Port Sdn Bhd is owned by Johor Corp (Unlisted). At that time, the intention was for Dialog to hold an 80% stake in the Langsat tank terminal with Trafigura (via Puma Energy Asia Pacific BV) holding the remaining 20%. SOURCE: LANGSAT PORT Dialog ropes in MISC as a partner. On 4 October 2007, Dialog announced that it had entered into a shareholders agreement with MISC for both companies to set up a new JV company called Centralised Terminals Sdn Bhd (CTSB). CTSB was to take over Dialog s erstwhile 80% stake in the Langsat tank terminal. Dialog was to hold a 55% stake in CTSB, while MISC was to hold a 45% stake. This meant that Dialog would have an effective 44% stake in the Langsat tank terminal, with MISC holding an effective 36% stake and Trafigura holding a 20% stake. The LTTF comprise two terminals, held under Langsat Terminal (One) Sdn Bhd and Langsat Terminal (Two) Sdn Bhd. Dialog to hold 80% of LTTF, after proposing to buy over MISC s stake. On 25 September 2017, Dialog announced that it had signed a share purchase agreement with MISC to buy over MISC s 45% stake in CTSB, which holds an 80% stake each in Langsat Terminal (One) Sdn Bhd and Langsat Terminal (Two) Sdn Bhd. The transaction is expected to be completed by end-october 2017 and will result in Dialog holding a 100% stake in CTSB. As such, Dialog s effective stake in the two Langsat terminals will rise to 80%, with Trafigura continuing to hold a direct 20% stake in the terminals. 85

86 Figure 60: Dialog plans to complete the purchase of MISC s 45% stake in CTSB by end-october 2017, resulting in Dialog holding an 80% stake in the LTTF SOURCE: DIALOG Land lease concession of 30 years. Langsat 1 and 2 have a 30-year land lease concession awarded by Tanjung Langsat Port Sdn Bhd beginning from 2007 to 2037F. Dialog is willing to renew the land lease with Tanjung Langsat Port Sdn Bhd once it expires in 2037F, if there is mutual agreement to do so. Land settlement. The LTTF and Tanjung Bin tank terminals saw the apron areas settling for two years after the tank terminals began operations. For Tanjung Langsat, while Dialog had fabricated the tanks, Johor Corp took on the land reclamation, site preparation and the building of other infrastructure (jetty, apron, roads). Langsat 1 had more serious land settlement issues, which require periodic levelling works. Langsat 1 and Langsat 2 combined capacity of 647,000 cbm. The Langsat terminals sit on 50 acres of land, with 42 tanks in total across both Langsat 1 and Langsat 2 providing total storage capacity of 647,000 cbm of petroleum products. Langsat 1 sits on 40 acres of land, with Phase 1 capacity of 130,000 cbm for the storage of naphtha and middle distillates, Phase 2 capacity of 270,000 cbm for the storage of fuel oil and gasoil and Phase 3 capacity of 76,000 cbm for the storage of drilling base oil, gasoline and biodiesel. Langsat 2 sits on 10 acres of land, with capacity of 171,000 cbm for the storage of gasoline. Both Langsat 1 and 2 are fully built-up and can no longer accommodate additional tanks. If Dialog wants to proceed with Langsat 3, then it will need to lease an additional piece of land. Operations commenced on September Langsat 1 s Phase 1 commenced operations in September 2009, Phase 2 in April 2010 and Phase 3 in August Langsat 2 was operational from December Services offered include storage, blending and distribution of petroleum products and by-products. Langsat 1 has five berths that can accommodate aframax-sized vessels (80, ,000 dwt) while Langsat 2 has another five similar berths. Leased primarily to oil trader, Trafigura, on a take-or-pay basis. Both Langsat 1 and 2 are used almost entirely by Trafigura, although there are some other customers too. Even with draft restrictions of 13-15m, Langsat 1 and 2 have their own niche in the tank terminals market. Langsat 1 and 2 are contracted by Trafigura on a take-or-pay basis so, regardless of its actual utilisation of the tank terminal, LTTF still earns a stable base revenue. However, if the terminals are full, LTTF can earn even more revenue on the back of throughput fees, which depend on the movement quantities into and out of the tankage facilities, and fees from other 86

87 Figure 61: Bird s eye view of the Tanjung Langsat port miscellaneous services, such as blending. Throughput fees and miscellaneous service fees go straight to the bottomline as the capital costs and fixed operating costs have already been covered by the base tank rental fees. SOURCE: GOOGLE MAPS 87

88 Contract period. The contract signed by Trafigura is for an initial period of seven firm and seven optional years (7+7 years) from September 2009, when Phase 1 of Langsat 1 commenced operations, to September The remaining Phases of Langsat 1 and of Langsat 2 were also leased to Trafigura on the same contract once they were commissioned. For the option period of seven years, Trafigura has renewed the lease of Phase 1 of Langsat 1 for another three years to September 2019F, with the remaining 4-year option period not yet exercised. In our view, the risks of non-renewal by Trafigura are low since Trafigura had requested for additional infrastructure to be installed at Langsat and was willing to guarantee Dialog additional renewal periods. Also, in the event that Trafigura does not renew in the future, Dialog may still be able to find other customers to rent the tank terminals. This is because the LTTF is not a dedicated facility but a common user facility. Langsat 3 did not take off. On 6 October 2011, Centralised Terminals Sdn Bhd, which at that time was a 55:45 JV between Dialog and MISC Berhad, entered into a shareholders agreement with China Aviation Oil (Singapore) Corporation Ltd (CAO SP, Not Rated) to establish a 74:26 JV named Langsat Terminal (Three) Sdn Bhd. Langsat 3 was to be a 380,000 cbm oil storage tank terminal facility within the vicinity of Tanjung Langsat Port costing an estimated RM371m. Construction was expected to commence in early-2012 and be completed by end-2013, upon which it was intended to commence operations. CAO was to have entered into a Terminal Usage Agreement with Langsat 3 for the lease of the tankage and related facilities. CAO is primarily involved in the trading of jet fuel. The agreement lapsed on 20 August 2012 and currently, Langsat 3 is not a priority for Dialog as it is focused on developing Pengerang. To develop Langsat 3, Dialog would have to lease additional land from Tanjung Langsat Port Sdn Bhd as the Langsat 1 and Langsat 2 land areas are already fully builtup. Utilisation currently full. Utilisation of Langsat 1 and Langsat 2 is currently full. The contribution to tank utilisation from traders playing the contango game is small. The main contributor to the full tanks at Langsat is the growth in demand for oil in the Far East, which also results in a rise in trading volumes, for which storage tanks are required. Legal disputes. There are several legal disputes involving the LTTF: In April 2014, Dialog s wholly-owned Dialog E & C Sdn Bhd received a notice of arbitration from Tanjung Langsat Port Sdn Bhd claiming RM700m in compensation and alleging that a fire that took place at the terminal in August 2008 was caused by Dialog breaching its obligations under the engineering, procurement, construction and commissioning (EPCC) contract. In October 2014, Langsat Terminal (One) Sdn Bhd commenced arbitration proceedings against Tanjung Langsat Port Sdn Bhd alleging that the latter had breached its obligations to provide a minimum draft of 16.5m at the approach channel in order to allow large VLCC tankers to berth at the port. Dialog is frustrated with Tanjung Langsat Port as the latter had failed to fulfill its promise to dredge the channel access to the port, forcing Trafigura to use smaller aframax-sized vessels. As a result, Dialog is now fully focused on the Pengerang site as the port and jetties at Pengerang are controlled by Dialog. In spite of this, Dialog is willing to renew the land lease with Tanjung Langsat Port Sdn Bhd once it expires in 2037F, if there is mutual agreement to do so. 88

89 Tanjung Bin tank terminal VTTI has a total storage capacity of 1.155m cbm at ATT Tanjung Bin Sdn Bhd (ATB), which is located at the Tanjung Bin oil terminal in southern Malaysia. The terminal handles gasoline, jet fuel, gasoil, fuel oil and biofuels, among other products. VTTI is the tank terminal unit of Vitol Group, a Swiss-based energy and commodity-trading multinational company. MISC purchased a 50% stake in VTTI from Vitol in September 2010 but sold it back to Vitol in August VTTI is currently 100%-owned by Vitol. Phase 1 of the terminal was commissioned in April 2012 and comprised 41 tanks with total storage capacity of 893,000 cbm. It is served by five berths with a maximum draft of 17.5m, which can cater to ships up to aframax size (80-120,000 dwt) but VLCCs cannot enter the port fully laden. Phase 2, which opened in August 2015, added a further 262,000 cbm of fuel oil tankage and takes ATB s total capacity to 1.155m cbm. The expansion includes a sixth berth, also with a maximum draft of 17.5m. The second phase of VTTI's storage unit at Tanjung Bin oil terminal has been fully leased to store fuel oil. ATB has the option of adding a further 0.55m cbm of tank storage capacity in Phase 3, as well as constructing four additional jetties. However, there is no news as to whether Phase 3 will be constructed. VTTI s Tanjung Bin tank terminals primarily cater to Vitol and it is facing issues attracting third-party customers as other oil traders do not want to use their competitor s facilities. The Asia Petroleum Hub (APH) project The Asia Petroleum Hub (APH) was an entity set up in 2005 to undertake the development and operation of an integrated oil terminal facility on 40.4 hectares of reclaimed land offshore Tanjung Bin, Johor. At that time, APH was 100%-owned by AQ Properties Sdn Bhd, which, in turn, was 90%-owned by KIC Oil and Gas Ltd and 10%-owned by Trek Perintis Sdn Bhd. KIC Oil and Gas Ltd was 50%-owned by Abdul Rashid Mohd Isa and 50% by Farzan Hassan. The tank terminal facilities were to be managed by Kadriah Integrated Facilities, a company that managed the oil terminals for KIC Oil and Gas at the Port of Tanjung Pelepas (PTP) and at Westports. The rationale for the construction of APH was to reduce the landed cost of imported petroleum products in Malaysia, avoiding double-handling charges incurred when oil products are first imported into the Singapore oil hub before being re-exported from Singapore to Malaysia. With the APH, shipments can be made from the source directly to the APH, where it will be stored prior to redistribution within Malaysia. The project was launched in July 2007 at an expected cost of US$529m. CIMB (CIMB MK, Not Rated) provided the bridging loan, of which RM840m was subsequently drawn down. Mott MacDonald was awarded the design and EPC contract while other contractors included Muhibbah Engineering (MUHI MK, Add, TP: RM3.36) and Nam Fatt Corporation (Unlisted). The project was originally scheduled to be completed in 2009 but, in April 2010, APH said that land stabilisation was an issue that needed more time to be resolved. The island on which APH sits was formed by earth that was dredged up in order to deepen the shipping channel leading up to PTP. The earth was dumped just south of PTP, creating the mound that is now the APH island. Unfortunately, the dredged earth is primarily composed of clay, which is unstable and tends to sink over time. In order to stabilise the land, a lot of sand has to be used, causing costs to exceed estimates. APH later encountered financial difficulties and, according to media reports, CIMB placed APH under receivership in June 2011, at which point the project was 64% completed. As at June 2011, APH had already spent US$265m on the project but said that it needed an additional US$630m in funding, suggesting that the project had overrun on its original cost estimates. CIMB was forced to take ownership of the asset, but in August 2016, CIMB signed a 89

90 provisional agreement to sell APH to Smart Crest Sdn Bhd, according to press reports. Figure 62: The Asia Petroleum Hub (APH) interested parties in the original incarnation of the project SOURCE: STAR As at 31 December 2016, Smart Crest was virtually 100%-owned by Ir. Chew Lee Kiat, aged 62, who was previously an Executive Director with Kencana Petroleum Bhd. On 12 January 2017, World Oil Hub Sdn Bhd (formerly known as Webs Oil Hub Sdn Bhd) acquired 70% of the shares of Smart Crest. World Oil was also virtually 100%-owned by Ir. Chew Lee Kiat, according to the Suruhanjaya Syarikat Malaysia (SSM) database. On 12 May 2017, Smart Crest Sdn Bhd awarded China Railway Engineering Corporation (CREC) a US$400m EPC contract for the construction of the APH oil terminal project. CREC will be responsible for the construction of the terminal on a turnkey basis. Fajarbaru Builder Sdn Bhd will be the local JV partner in charge of civil works. Construction on the project was to have begun in 3Q17 and expected to be completed in months. As mentioned earlier, the APH project was already 64% completed when Smart Crest took over. CREC is an EPC contractor and presumably has no equity stake in the APH project. The APH berths will be located on the east of the island and will have limited draft of 17.5m, which can only accommodate suezmaxes or half-laden VLCCs. According to our discussion with industry sources, APH had been envisioned as a bunker hub for the storage of marine fuel oil (MFO) from the start and the template for the kind of tank terminals that were to be planted on the island was already established some time back before the work was discontinued in Foundation works and piling for the MFO tanks had already been undertaken several years ago. With the revival of the project in 2017, the new owners are likely to go ahead to complete the tank terminal based on the pre-existing template, in our view, in order to salvage the value of the sunk costs. The alternative is costly re-piling to reconfigure the terminal based on a new template, which the new owners are unlikely to do, in our opinion. 90

91 Figure 63: Ground view of the APH site The key issue, therefore, is whether the pre-existing template is still relevant for the future. Given the upcoming implementation by the International Maritime Organization (IMO) of low-sulphur marine fuel requirements on 1 January 2020F and the possible decline in demand for traditional 3.5% sulphur MFO, it remains an open question whether there will be enough demand to keep APH s MFO tanks full once they are completed. Please see Appendix 7 for a detailed discussion on the upcoming IMO requirements for marine fuel. SOURCE: 91

92 Figure 64: The Asia Petroleum Hub (APH) location relative to the Port of Tanjung Pelepas (PTP), Tuas Port, the VTTI tank farm, the Tanjung Bin coal-fired power plant, and the Tanjung Piai Maritime Industrial Park (TPMIP) Tanjung Bin coalfired power plant Tanjung Piai Maritime Industrial Park (Benalec) Asia Petroleum Hub (APH) project Future Tuas Port SOURCE: GOOGLE MAPS, CIMB RESEARCH 92

93 The Tanjung Piai Maritime Industrial Park (TPMIP) project The Tanjung Piai Maritime Industrial Park (TPMIP) is currently taking shape via the land reclamation activities of Spektrum Kukuh Sdn Bhd, which is 70%- owned by Benalec Holdings Bhd and 30%-owned by two individuals the Johor crown prince Tunku Ismail Idris Sultan Ibrahim and Daing A. Malek Daing A. Rahaman. Once completed, the reclaimed man-made island of the TPMIP is expected to have a total land area of 3,487 acres. It is situated just south of the Port of Tanjung Pelepas (PTP), on the southwest corner of Johor, to the west of Jurong Island. It will have a 7km stretch of seafront land and berths of 24-30m draft that are able to accommodate fully-laden VLCCs. The trestle can extend up to 700m to reach water draft of 24m and further to 850m length to reach water draft of 30m. On 23 January 2015 and on 23 June 2016, Spektrum Kukuh received two approvals from the Department of Environment (DOE) for the Detailed Environment Impact Assessment (DEIA) report that was submitted earlier, and was then able to proceed with land reclamation works. In the masterplan, Phase 1 will consist of the first 1,080 acres, Phase 2 will be 1,008 acres and Phase 3 will be 1,399 acres in size. We think Phase 1 and Phase 2 may be set aside for tank terminals as they have access to the deepwater berths to be located on the south of the island. Phase 3 may be used to house industrial parks and warehouses. Reclamation works began on 8 December 2015 and, by end-2016, Spektrum Kukuh had reclaimed the first 200 acres of Phase 1, with Benalec Holdings Bhd funding the reclamation costs with its own internal cash resources. Up to September 2017, Spektrum Kukuh had spent RM269m to reclaim the land. TPMIP cannot be extended from the mainland in the form of a peninsular reclamation because of the protected mangrove forests of the coastline, which forms the Tanjung Piai National Park. Environmental regulations require a 500m distance between the mainland shoreline and the shoreline of the TPMIP. Spektrum Kukuh is currently stabilising 100 acres of the land with prefabricated vertical drain (PVD) technology, which is expensive but speeds up the process of settlement. The 100 acres of land are expected to be ready for topside construction by 1Q18F. The 100 acres are expected to accommodate 1.13m cbm of petroleum product tanks, which will take months to complete and is targeted for completion by end-2019f or early-2020f, upon which it may commence its lease to a potential off-taker. The remaining acreage of Phase 1 is expected to be fully reclaimed within five years, i.e. by end-2020f, according to Benalec s masterplan. The entire reclamation exercise is targeted for completion in 15 years, i.e. by end-2030f. The entire Phase 1 is expected to accommodate up to 8m cbm of tank terminal capacity, which is targeted to be built up over a total period of 15 years. Phase 2 may accommodate at least another 8m cbm, if the entire land is set aside for tank terminal operations, to bring the total to 16m cbm. By comparison, Dialog s Pengerang Deepwater Terminal (PDT) project will have a total reclaimed land area of 500 acres once fully reclaimed and, if we include the Buffer Industrial Land and the Sungai Rengit Industrial Estate, the total land area for the PDT project comes to 1,200 acres, which can accommodate up to 15m cbm of tank terminal capacity. Spektrum Kukuh is actively looking for JV opportunities with potential local and international tank terminal operators. Mike Beviss, senior commercial advisor for Benalec Holdings, told Tank Storage Magazine on 15 September 2017 that, We have currently identified and are in negotiations with a first-class terminal operator, together with a prospective term customer, with whom we hope to conclude mutually acceptable arrangements by the end of We believe that the negotiations with the independent tank terminal operator and the prospective term customer are on a back-to-back basis, meaning that the equity investment by the independent tank terminal operator and the 93

94 subsequent construction of the tank terminals, are dependent on whether TPMIP succeeds in securing a long-term off-taker for the tanks. The independent tank terminal operator may take a majority stake in the initial 1.13m cbm of petroleum product tanks that will be planted on the first 100 acres of TPMIP, with Benelac holding a 20-30% minority stake in the JV company that will be set up between Benalec and the terminal operator. According to our discussions with Benalec, this potential investor is currently not present in the Singapore Straits region, which is why it may be interested to take a stake in TPMIP. The deal will involve the new JV company buying over the reclaimed 100 acres from Spektrum Kukuh, after which topside construction can start. The potential off-taker is expected to lease the bulk of the initial 1.13m cbm capacity for a certain number of years and will work together with the JV company to design a new tank terminal that will be best suited for the post-1 January 2020F requirements for 0.5% sulphur marine gas oil (MGO). This new tank terminal will have the flexibility of blending different products together to meet the needs of the shipping market post 1 January 2020F, which are currently nebulous. Ships may switch wholesale from their current use of 3.5% sulphur marine fuel oil (MFO) to 0.5% MGO or continue using 3.5% sulphur MFO. As long as the new tank farm has the mix of tanks and blending capabilities to meet the new marine fuel paradigm post 1 January 2020F, the oil trader or distributor will be in a good position to meet market requirements. Figure 65: The Tanjung Piai Maritime Industrial Park (TPMIP) is located close to Jurong Island and the Singapore bunkering hub SOURCE: BENALEC 94

95 Figure 66: Artist s impression of the completed Tanjung Piai Maritime Industrial Park (TPMIP) SOURCE: BENALEC 95

96 Figure 67: The Tanjung Piai Maritime Industrial Park (TPMIP) will developed in three phases, with Phases 1 and 2 dedicated to the planting of tank terminals, as they have direct access to the berths located to the south of the island Total Tanjung Piai reclaimed area: 3,487 acres Asia Petroleum Hub 1,399 acres 380 acres 500m from shore to shore 500 acres 1,008 acres 1 st 100 acres 2 nd 100 acres SOURCE: BENALEC 96

97 Figure 68: The key unknown is how congested the shipping lanes southwest of Johor will become, given the locations of Tanjung Piai Maritime Industrial Park (TPMIP), APH, the VTTI tank farm, the Tanjung Bin coal-fired power plant, the PTP port which may be extended southwards with eight new berths, and the location of the giant new Tuas container port that is being developed now Proposed bridge across Pulai River Bunkering terminal Future Free Zone area phase 3 Tanjung Bin coalfired power plant Forest City current island land reclamation and extension still ongoing Asia Petroleum Hub (APH) project Tanjung Piai Maritime Industrial Park (Benalec) Forest City - another two islands to be reclaimed SOURCE: GOOGLE MAPS, BENALEC, PORT OF TANJUNG PELEPAS 97

98 APPENDIX 3: THE PENGERANG INTEGRATED PETROLEUM COMPLEX (PIPC) PIPC is Malaysia s most significant downstream refining and petrochemical investment in decades The Pengerang Integrated Petroleum Complex (PIPC) project sits on 22,000 acres of land. The PIPC comprises three separate parts, and will include: The Refinery and Petrochemical Integrated Development (RAPID) project (6,500 acres), which includes an oil refinery, a steam cracker plant, and several petrochemical plants, Several oil storage facilities in the Pengerang Deepwater Terminal (PDT) (1,200 acres in total, comprising 500 acres of reclaimed land and another 700 acres of mainland), An LNG regasification plant (which sits in the PDT), together with several power plants (within RAPID), and Another 14,500 acres of land for future development of oil and gas infrastructure, which may include more oil refineries and petrochemical plants. The RAPID project is part of the Pengerang Integrated Complex (PIC), which is located within the PIPC. Petronas s oil refinery and steam cracker plant On 3 April 2014, Petronas made a final investment decision (FID) to invest in the Pengerang Integrated Complex (PIC) in Southern Johor, Malaysia, which includes the RAPID refinery with a capacity to process 300,000 bopd of crude oil, as well as the steam cracker that is capable of producing 3m tonnes p.a. of petrochemicals. Combined, the refinery and steam cracker will have a total capacity to produce 7.7m tonnes p.a. of various grades of products including differentiated and specialty chemical products such as synthetic rubbers and high-grade polymers. Feedstock from the steam cracker may encourage more downstream petrochemical plants to be constructed within PIC. At the time of the announcement in April 2014, Petronas estimated that RAPID would cost about US$16bn while the associated facilities would involve an investment of about US$11bn. Hence, PIC capex is estimated at US$27bn. The refinery start-up was estimated for early 2019F. The project will also see the development of a host of associated facilities i.e. the raw water supply facility, power co-generation plant, LNG regasification terminal and other ancillary facilities. On 28 February 2017, Saudi Aramco signed an agreement to buy a 50% stake in selected ventures and assets in the RAPID project for a total of US$7bn. Saudi Aramco will supply up to 70% of the crude feedstock requirement of the refinery, with natural gas, power and other utilities to be supplied by Petronas. Saudi Aramco s entry into RAPID and its promise to supply 70% of the crude feedstock requirement strengthen the viability and bankability of Dialog s Pengerang Deepwater Terminal (PDT) project. Petronas said on 28 February 2017 that almost 60% of the PIC development is completed, and that it is on track for refinery start-up in 1Q19F. 98

99 Figure 69: The PIPC project incorporates an oil refinery and cracker plants, and several petrochemical plants at the RAPID complex, as well an LNG regasification terminal and the Pengerang Deepwater Terminal (PDT) SOURCE: PETRONAS Petronas Chemicals petrochemical plants The output of Petronas s steam cracker ethylene, propylene and butadiene will be used as feedstock for Petronas Chemicals original three petrochemical plants, i.e. PRPC Polymers, PRPC Glycols and PRPC Elastomers. These plants were to produce multiple types of products, for domestic consumption as well as for export. These three petrochemical plants have a total nameplate capacity of 3.5m tonnes per annum (tpa), which was to have been a significant 70% increase from Petronas Chemicals current olefins and derivatives nameplate capacity of 5m tpa. However, on 14 April 2016, Petronas Chemicals announced that it had decided to cancel plans to build the elastomers plant due to concerns about the future prospects of the synthetic rubber segment. As such, Petronas Chemicals investments in RAPID had been reduced to US$2.6bn from the original capex commitment of US$3.9bn, or a reduction of 33%. Elastomers are polymers with elastic properties, generally used as alternatives to natural rubber. At that time, Petronas Chemicals said that it remained committed to carrying out the two other projects, namely, the polymers and glycols projects, which are scheduled to start in 2019F. On 18 April 2017, Petronas Chemicals announced that it has made the Final Investment Decision (FID) for an isononanol (INA) plant in Pengerang. The proposed plant will have a production capacity of 250,000 tonnes per annum, and will cost US$442m. The project is expected to come on-stream by 2HCY19F. 99

100 The investment will mark Petronas Chemicals entry into a niche business with high entry barriers, which is predominantly controlled and commercialised by technology owners for their own captive use. Germany s BASF will provide its licensed isononanol (INA) production technology to Petronas Chemicals. INA is an oxo-alcohol that is mainly used for the production of diisononyl phthalate (DINP), a high molecular weight phthalate plasticiser, which is widely used in industrial applications such as automotive, wires and cables, flooring, buildings and construction. The major feedstock for the INA plant is Raffinate-2, which will be supplied from Petronas s steam cracker while the ancillary feedstock supply, mainly hydrogen and oxogas will be sourced from the integrated oil refinery and steam cracker complex, respectively. On 16 May 2017, Petronas Chemicals and Saudi Aramco said that they were exploring options to build more petrochemical plants in Pengerang. On 2 October 2017, Petronas Chemicals announced that it was selling a 50% stake in wholly-owned unit PRPC Polymers Sdn Bhd to Saudi Aramco for US$900m, to share PRPC Polymers' business risks. Figure 70: Apart from Petronas and Petronas Chemicals investments at RAPID, several other investors were originally intended to invest in the PIPC. None of these subsequently materialised, but other investors may yet come in. SOURCE: MALAYSIA PETROLEUM RESOURCES CORPORATION (MRPC) 100

101 Figure 71: Petronas s oil refinery will refine crude oil and produce propylene, the steam cracker will turn naphtha into the building blocks of the petrochemical industry, i.e. ethylene, propylene and butadiene SOURCE: PETRONAS CHEMICALS Figure 72: Petronas Chemicals is making a major investment in Pengerang and is currently building three petrochemical plants SOURCE: PETRONAS CHEMICALS 101

102 APPENDIX 4: PENGERANG DEEPWATER TERMINAL The Pengerang Deepwater Terminal (PDT) The PDT & LNG Terminal sit on 500 acres of reclaimed land, of which 320 acres have been reclaimed, with 180 acres to be reclaimed. In addition, there are 700 acres of buffer industrial estate land, the Sungai Rengit Industrial Estate, and the existing Dialog Fabricator Pengerang Facility (DFPF), which are located directly to the north of the terminal. These have yet to be developed but will form part of the PDT in the future. Dialog made a choice to commence the building of the PDT on reclaimed land, which is more expensive compared to building on the original land, and there is also a greater level of uncertainty as to how long the entire process of land reclamation will take. However, it will likely be faster to execute as it avoids red tape related to the approvals needed for the transfer of land titles, and the time needed by existing occupants of the land to vacate the area. Furthermore, there are other benefits to building on reclaimed land, i.e. since the jetty protrudes out further into the sea, the water depth is greater, which would save on substantial dredging costs. Of course, some dredging is still required to level the uneven seabed and remove any rocks in the approach channel. The PDT terminal has jetty facilities capable of handling VLCCs and ULCCs, with draft of 24 metres, and is also a sheltered harbour. The piloting of the vessels is the responsibility of the Johor Port Authority, and the mooring services are provided by Dialog s 70%-owned Pengerang Marine Operations Sdn Bhd. The latter will handle all the coordination required with the Johor Port Authority in relation to the movement of the vessels within Malaysian waters. The PDT project will have a total reclaimed land area of 500 acres once fully reclaimed, and has been subdivided by Dialog into at least three phases. If we include the Buffer Industrial Land, the Sungai Rengit Industrial Estate and the Dialog Fabricators Pengerang Facility (DFPF), the total land area for the PDT project would come to 1,200 acres. The land reclamation work at PDT Phases 1 and 2 was done very well, such that the apron areas did not see any land settlement at all. In contrast, the Tanjung Langsat and Tanjung Bin tank terminals saw the apron areas continue to settle in the two years after the tank terminals began operations, according to our discussions with industry sources. Phases 1, 2, 3, and beyond Phase 1 comprises the tank terminals that are housed under Pengerang Independent Terminals Sdn Bhd, otherwise named as SPV1. Phase 2 comprises three separate areas, i.e. SPV2, SPV3, and SPV4. SPV2 houses the dedicated industrial terminal for Petronas s RAPID complex, held under Pengerang Terminals (Two) Sdn Bhd. SPV3 houses the LNG regasification plant that is operated by Petronas Gas Bhd, held under Pengerang LNG (Two) Sdn Bhd. SPV4 has not been developed yet. Phase 3 and beyond will be developed in the future, and is currently marked as Future in Dialog s map below. This area has not been reclaimed yet, as seen on Google Maps. The cost to reclaim the land area at Phase 3 may be higher than for Phase 1 and Phase 2, because of the deeper draft. In addition, more tank terminals could be built on Dialog s fabrication facilities on the western end of the PDT area, the Buffer Industrial Land, and the Sungai Rengit Industrial Estate. We estimate the total land area yet to be developed is at around 880 acres. Phase 3 and beyond will be subdivided into SPV5, SPV6, SPV7, etc., with each one in a separate JV structure with its own shareholders. Dialog will work to develop Phase 3 of PDT in a gradual and phased manner, over a period of 10+ years. This is because Dialog has manpower constraints 102

103 on the EPCC side, and also does not want to strain its cash flows. Dialog generally exercises great financial prudence in its expansion plans. Figure 73: Schematic plan for the development of the Pengerang Deepwater Terminal (PDT) Part of future SPV1 development Part of future SPV2 development SOURCE: DIALOG Maximum tank terminal capacity at PDT of around 15m cbm Dialog s initial representation to the public was that the PDT facility would ultimately accommodate storage capacity of 5m cbm once it is fully built up. However, the reality is that it can accommodate up to 15m cbm in total, comprising: a) Phase 1 held under Pengerang Independent Terminals Sdn Bhd (SPV1) currently has 1.3m cbm of storage capacity, with sufficient land space to build another 1m cbm, for a total of 2.3m cbm. The decision was made recently to add 430,000 cbm, and the decision to add a further 570,000 cbm of capacity will be made soon, in our view. b) Phase 2 held under Pengerang Terminals (Two) Sdn Bhd (SPV2) will have 2.1m cbm of storage capacity once fully commissioned; commissioning will be progressive from 2019F onwards. c) Phase 3 and additional SPV s would accommodate at least another 10m cbm of storage capacity. Hence, total PDT storage capacity will likely be approximately 15m cbm. These additional tank terminals can be planted on the to-be-reclaimed Future land, the Buffer Industrial Land (which will be split up between SPV1 and SPV2), the Sungai Rengit Industrial Estate, and the Dialog Fabricator Pengerang Facility. Dialog recently purchased an additional parcel of land to the North of the Sungai Rengit Industrial Estate, which will also be part of the future PDT development. A total of five jetties will be built at the PDT complex, each sufficient to accommodate storage of 3m cbm, or 15m cbm in total. This would be the ideal maximum storage capacity at PDT. At the moment, only two jetties have been built, i.e. at SPV1 and SPV2. Dialog believes that a maximum five jetties would be optimum in order to avoid shipping congestion issues. The total capacity of the tankage facilities at PDT is very much dependent on the mix of liquids to be stored. Crude tanks are very large up to m in diameter but petrochemical tanks are much smaller only 5-10m in diameter; however, these small tanks occupy space too and there is a required minimum amount of separation between the tanks. 103

104 Figure 74: Bird s eye view of the Pengerang Deepwater Terminal about two-thirds of the area has been reclaimed to-date SOURCE: GOOGLE MAPS How Dialog benefits from the PDT development The PDT facility benefits from the spillover from Singapore s land-scarce environment on Jurong Island, where the majority of the country s storage tanks are located. Within six months of commencing operations in April 2014, SPV1 was already at a high level of utilisation (essentially full ), benefiting from the oil price rout that started in mid-2014 that stimulated demand by traders to store oil. Dialog is now working towards securing new potential partners for subsequent phases of the PDT. Further development of the PDT will provide more opportunities for Dialog s in-house engineering, construction and fabrication services. When the oil refinery and steam cracker plants come on-stream, this could lead to increased demand for Dialog s plant maintenance and catalyst-handling services. 104

105 Figure 75: The Pengerang Deepwater Terminal in relation to Petronas RAPID SOURCE: VOPAK Short history of the PDT development In November 2007, Dialog identified Pengerang as a suitable location to develop a deepwater petroleum terminal for oil storage and trading. On 8 June 2009, Dialog signed an MoU with the Johor state government to explore the feasibility of the development of PDT. The MoU granted Dialog the rights to reclaim the land between the coastal line of Tanjung Ayam and Tanjung Kapal with the view to build, own, maintain and operate a deepwater petroleum terminal, including tankage and marine facilities. On 20 July 2009, Vopak signed an MoU to Dialog to jointly study the feasibility of developing an independent storage terminal for oil products in Pengerang, which is at the southern tip of Johor. From September 2009 to April 2010, Dialog conducted feasibility studies to ensure that the Pengerang site was indeed feasible. This included bathymetric studies, soil investigation, navigation and hydraulic studies. Also, between December 2009 and April 2010, the Detailed Environment Impact Assessment (DEIA) was performed for the PDT. On 6 October 2010, Dialog obtained approval from the Johor state government to develop the Pengerang Deepwater Terminal (PDT) for a period of 65 years, with an option to extend for another 34 years, for a total land lease period of 99 years. In some media releases, it was mentioned that the land lease period was for 60 years, rather than 65 years, but 65 years is the accurate duration. On 13 May 2011, Dialog Pengerang Sdn Bhd obtained land rights and development rights from the Johor state government to develop the Pengerang 105

106 LNG facilities in Phase 2 of the PDT development. Dialog acronym for the Pengerang LNG facilities in Phase 2 is SPV3. On 1 June 2011, Dialog s wholly-owned Dialog E & C Sdn Bhd won a RM1.9bn EPCC contract, including land reclamation works, to develop Phase 1 of PDT, which is held under Pengerang Independent Terminals Sdn Bhd, otherwise known as SPV1. Dialog E & C Sdn Bhd s track record included EPCC for terminal facilities in Kertih and Tanjung Langsat, as well as the award by Petronas Carigali in October 2010 for the RM61m EPCC of a new condensate tank at the Bintulu Crude Oil Terminal. On 23 June 2011, the shareholding agreement between Dialog and Vopak with respect to their shareholdings in Pengerang Independent Terminals Sdn Bhd took effect. The State Secretary, Johor (Incorporated) took a shareholding stake in Pengerang Independent Terminals Sdn Bhd on 20 July Dialog has an effective 46% in Phase 1, with Vopak holding an effective 44% and the SSI holding a direct 10% stake. From August 2011, the land reclamation works started at Pengerang started. On 21 November 2013, Dialog entered into an MoU with Concord Energy Pte Ltd to study the feasibility of developing dedicated crude oil and petroleum products storage terminals at a new phase in Pengerang. Concord Energy is one of Singapore s leading crude oil and refined products trading companies. However, ultimately, there was no progress with this MoU. In March 2014, Phase 1A of Pengerang Independent Terminals Sdn Bhd or SPV1 achieved mechanical completion. In April 2014, Phase 1A of SPV1 commenced operations, and the entire construction was completed on 30 December On 14 November 2014, shareholders agreement between Dialog and Petronas Gas was signed with respect to Pengerang LNG (Two) Sdn Bhd, which will own the regasification terminal at Pengerang, otherwise known as SPV3. Dialog owns a 25% interest in SPV3, with Petronas Gas holding 65% and SSI holding 10%. SSI s 10% investment was effected in September On 19 December 2014, Petronas s wholly-owned PRPC Utilities and Facilities Sdn Bhd, Dialog and Vopak entered into a shareholders agreement with respect to Pengerang Terminals (Two) Sdn Bhd, which will own dedicated industrial terminals for Petronas s RAPID complex, and is also known as SPV2. SSI took a shareholding stake in SPV2 in September Dialog has an effective 25% in SPV2, with PRPC Utilities and Facilities Sdn Bhd holding a 40% stake, and the SSI holding a 10% stake. The EPCC work for SPV2, worth RM5.5bn, was subsequently awarded to Dialog Plant Services Sdn Bhd as the main contractor. From 1 July 2015, Platts FOB Singapore refined product price is moved to FOB Straits, which incorporates ports in Malaysia as well as in Singapore. The Indonesia tank terminal at Karimun was included under FOB Straits from 3 July On 18 August 2017, Vopak, which has a 44% effective stake in Pengerang Independent Terminals Sdn Bhd or SPV1, announced that it and its JV partners have agreed to expand SPV1 by 430,000 cbm for the storage of clean petroleum products, to an expanded capacity of 1.7m cbm. The expansion was expected to be commissioned progressively from 1QCY19F. As part of the expansion, one additional berth will be added, taking the total number of berths to six at SPV1. 106

107 Pengerang Independent Terminals (SPV1) Phase 1 of the Pengerang Deepwater Terminal (PDT) is parked under Pengerang Independent Terminals Sdn Bhd (PITSB). Dialog s acronym for Phase 1 is SPV1. Shareholding structure Dialog has an effective 46% stake in Phase 1, with independent tank terminal operator Vopak holding an effective 44% and the State Secretary, Johor (Incorporated) (SSI) holding a direct 10% stake. The shareholding agreement between Dialog and Vopak with respect to their shareholdings in Pengerang Independent Terminals Sdn Bhd took effect on 23 June 2011, while SSI s entry into Pengerang Independent Terminals Sdn Bhd took effect on 20 July Partner Vopak is the world s largest independent tank storage service provider, with 78 terminals worldwide and operations in 28 countries, and total storage capacity of 33.5m cbm. Apart from being a shareholder in SPV1, Vopak is the technical operator. The operations of SPV1 are very efficient and possibly even more efficient than Singapore, in our view, due to lower port congestion. Vopak does not take any capacity at SPV1 and is not a customer, unlike Trafigura at the Langsat terminals. Dialog was the EPCC contractor for the terminal, in addition to being a shareholder. As SPV1 is an independent terminal, the end-users or customers do not have an equity stake in the tank terminal. Figure 76: Shareholding structure of Pengerang Independent Terminals Sdn Bhd (SPV1) Dialog has an effective stake of 46% currently SOURCE: DIALOG Land lease duration of 65 years Phase 1 sits on 150 acres of land. The land lease for SPV1 is for 65 years starting from 2011 to 2076F, with a 34-year optional extension period to 2110F, for a total land lease period of 99 years. The land lease costs will be revised at the start of the optional extension period, to be based on the market value of the land at that point in time. The land lease period commenced from the time the land reclamation work commenced. Capacity of 1.3m cbm, capex of RM2.5bn Currently, Phase 1 has 50 petroleum product tanks and seven crude oil tanks with storage capacity of 1.3m cbm, complete with a dedicated deepwater jetty facility with five berths. 107

108 Phase 1A, which consists of 25 tanks with a total storage capacity of 432,000 cbm, achieved mechanical completion in March 2014, and was operational on 12 April 2014 when it received its first vessel. Phase 1B is dedicated to the storage of petroleum products, and achieved mechanical completion in September Phase 1C is dedicated to the storage of crude oil, and achieved mechanical completion in March Dialog s wholly-owned subsidiary, Dialog E & C Sdn Bhd, undertook the construction of SPV1. The construction of Phase 1 commenced in 3Q11. Phase 1 commenced operations in April 2014, and the entire construction was completed on 30 December Each tank is typically about 22m high, and depending on the diameter of the tank, has storage volume of 10,000 cbm, 75,000 cbm, or 35,000 cbm. The entire Phase 1 project with storage capacity of 1.3m cbm had cost RM2bn to set up, or RM2.5bn including the payments made to secure the 65-year land lease and the land reclamation costs. The shareholders financed the RM2.5bn project cost via 70% debt and 30% equity. Of the total SPV1 loans, 82% have been swapped into fixed rates as result of interest rate hedges. Figure 77: The current landscape at SPV1, with the upcoming SPV1 expansion marked below SPV1 expansion of 570,000 cbm crude tanks SPV1 expansion of 430,000 cbm clean petroleum product tanks SOURCE: DIALOG Expansion of 1m cbm to a total of 2.3m cbm underway Another 1m cbm of additional storage capacity can be built for expansion purposes on land that has already been reclaimed. The cost of building this additional 1m cbm is around RM1bn, or RM1,000/cbm. It will cost much less to build the additional 1m cbm of storage tanks, than for the original 1.3m cbm, because the infrastructure required, such as the land reclamation, the control tower, the office building, fire-fighting station and the jetty, is already in place. According to Vopak s press release dated 18 August 2017, SPV1 s shareholders have decided to expand SPV1 by adding 24 new clean petroleum product tanks (10,000-25,000 cbm each) for total capacity increase of 430,000 cbm, to raise total capacity to 1.7m cbm. This additional capacity will be commissioned progressively from 1QCY19F. One extra berth will also be added to SPV1, to raise the total number of operating berths to six. We expect the capex be 70% funded by debt. Another 570,000 cbm in capacity at SPV1 will be added later, this time, for the storage of crude oil. 108

109 Utilisation has been full since mid-2015 Storage utilisation was fully leased from mid-2015 (90% leased according to April 2015 report by Malaysian Reserve), after the fall in oil prices that started in mid-2014, as oil traders took whatever capacity they could to benefit from the upward sloping forward curve. Utilisation of SPV1 currently remains full, according to Dialog. Despite the rise in global tank storage capacity, the volume of independent tank terminal capacity offered by Dialog in competition with Singapore is only limited to the capacity of SPV1, i.e. 1.3m cbm or up to 2.3m cbm. This is because the Langsat terminal is mainly for the use of Trafigura, while the SPV2 terminal is a dedicated, industrial terminal for the use of Petronas. Operational snippets SPV1 serves as a tankage facility for the handling, storage, blending and distribution of crude oil and petroleum products of oil majors and traders. When the ship offloads oil into the tanks, the pumps are located on the ships, and from the jetty, the ships can pump oil into any tank. When the tanks offload oil into the ships, there is a pumping station at the tank farm, which will pump the oil into the vessel. The tank farm can also perform blending, e.g. combining RON92 to RON97 to derive RON95, before pumping the motor gasoline into the ship. The tank farm can even put certain additives into the gasoline before pumping it into the ship. Commercial terms PITSB was included in the Platts FOB Straits price benchmark in middle of 2015, which means that the same price is quoted for oil products regardless of whether they are delivered from Singapore or from SPV1. SPV1 s functional currency is S$ because the lease rates are denominated in S$. Hence, SPV1 competes directly with Singapore s tank terminals that also charge in S$ terms. The storage rates offered by SPV1 started out lower than for Singapore, but the rates have now climbed up to approximate parity with the rates in Singapore. When the initial contracts with SPV1 s customers expired, the customers had gained confidence in SPV1 and hence, the renewal contracts were for longer durations and rates also improved. The average duration of the leases started out at six months to one year, but the duration has climbed up to 2-3 years with some contracts even as long as four years. The lease rates tend to be higher for shorter durations, and lower for longer durations. The highest rates are for spot storage, but there is little visibility on the spot business. Typically, around 85% of the tanks are leased on term contracts and the remaining 15% may be leased on spot contracts. We are not concerned about emerging competition for Dialog s SPV1 There are ongoing plans to construct new independent tank terminals at the Tanjung Piai Maritime Industrial Park (TPMIP) and at the Asia Petroleum Hub (APH), both on the southwest corner of Johor, near the Port of Tanjung Pelepas and Jurong Island. The TPMIP development is spearheaded by Benalec Holdings Bhd, whose core business is land reclamation. Benalec is taking the initiative to reclaim land at Tanjung Piai, but is concurrently looking for a JV partner among independent tank terminal operators. Benalec is also talking to potential lessees for its to-be-built tanks. APH is being spearheaded by Smart Crest and World Oil Hub Sdn Bhd, which are companies owned by Ir. Chew Lee Kiat, aged 62, who was previously an Executive Director with Kencana Petroleum Bhd. In May 2017, China Railway Engineering Corporation (CREC) was awarded a US$400m EPC contract for the construction of the APH oil terminal project. 109

110 The TPMIP development is looking to add 1.13m cbm of capacity by end- 2019F (operational by early-2020f), while APH is looking to build tank capacity of up to 1m cbm, although the completion timeframe is unknown. Altogether, TPMIP and APH may add more than 2m cbm of independent tank terminal capacity in the next five years, against Dialog s expanded SPV1 capacity of 2.3m cbm. Both of these two upcoming developments are currently undergoing various stages of land reclamation and land settlement works, and upon completion, topside construction can begin. If these two developments come on-stream, the Singapore Straits region could see more intense competition between operators of independent tank terminals, which could have negative impact on utilisation rates and/or average leasing rates. However, we are not too concerned with Dialog s ability to retain customers at SPV1, as SPV1 has some intrinsic advantages, as follows: 1. First, at an expanded capacity of 2.3m cbm, SPV1 will be the one of the single-largest independent tank terminals in the Singapore Straits, second only to Universal Terminal s 2.33m cbm on Jurong Island. In third place, is the Tankstore terminal on Busing Island of 2m cbm. This allows oil traders to consolidate their tankage requirements in one place, rather than having storage on several different tank farms across Jurong Island. Commercial negotiations for leasing of tank space is therefore simplified. 2. Second, the entire Pengerang Deepwater Terminal (PDT) was built with the latest tank farm technology to ensure efficient operations, which also means that the entire PDT is linked via pipeline. In comparison, many of the tank farms on Jurong Island are not linked via pipeline, meaning that oil traders lifting oil products need to berth at different terminals across Jurong Island just to fill up one tanker vessel. In contrast, tankers docked at any one berth in PDT will have pipeline access to all the tanks in PDT. 3. Third, oil traders storing oil at PDT will have access to the output of Petronas s RAPID refinery and Petronas Chemicals petrochemical plants. These Petronas facilities add significant value to PDT, in the same way that the oil refineries and petrochemical plants on Jurong Island add value, volume and depth to the throughput of tank terminals on Jurong Island. These strengths will not be available to the operators of the TPMIP and APH terminals that are currently under construction on the southwest corner of Johor. Repayment of facilitation fund expected once IRR hits 11% During the construction stage, the federal government extended a grant of RM170m to SPV1, called a facilitation fund. This facilitation fund is supposed to be paid back to government once SPV1 achieves IRR of 11% in any particular year, with the repayment period over five years, or the balance number of years to 2035F (Year 20), whichever is shorter. In FY16, the facilitation fund of RM175m (including exchange difference) was reclassified from a balance sheet liability to a negative item under property, plant and equipment due to change in accounting estimate on the achievability of IRR of more than 11%, according to the financial statements of PITSB. This was an auditor initiative, based on the auditor s calculations on the expected project IRR. In our view, once the SPV1 expansion of 1m cbm is completed, Dialog should be able to achieve project IRR of above 11%, and hence, eventually the facilitation fund will have to be paid back. 110

111 Pengerang Terminals (Two) Sdn Bhd (SPV2) Phase 2 of the Pengerang Deepwater Terminal (PDT) is parked under two separate companies: 1. Pengerang Terminals (Two) Sdn Bhd (PT2SB), which is a dedicated tank terminal facility for Petronas s oil refinery and Petronas Chemicals petrochemical plants. Dialog s acronym for this company is SPV2. 2. Pengerang LNG (Two) Sdn Bhd (PL2SB), which houses an LNG regasification plant, as well as two LNG storage tanks of 200,000 cbm each. Dialog s acronym for this company is SPV3. In this section, we will discuss only SPV2. Shareholding structure Dialog owns a 25% stake in PT2SB, with 40% held by Petronas s whollyowned PRPC Utilities and Facilities Sdn Bhd, 25% by Vopak and 10% by the State Secretary, Johor (Incorporated) (SSI). The shareholders agreement between Dialog, PRPC UF and Vopak was signed on 19 December 2014, and the 10% investment by SSI was effected in September 2015 with an equity injection of RM7.8m. Figure 78: Shareholding structure of Pengerang Terminals (Two) Sdn Bhd ( SPV2 ) Dialog has a 25% stake currently SOURCE: DIALOG Land lease duration of 65 years SPV2 sits on 157 acres of land. The land lease for SPV2 is for 65 years starting from 2011 to 2076F, with a 34-year optional extension period to 2110F, for a total land lease period of 99 years. The land lease costs will be revised at the start of the optional extension period, to be based on the market value of the land at that point in time. Although SPV2 is expected to be ready only in January 2019F, the land lease commenced at roughly the same time as SPV1, as the land reclamation began about the same time. The land lease period commences from the time the land reclamation work commences. Expected capex of RM7.7bn Dialog s official capex guidance for the entire SPV2 remains RM6.3bn, but the audited financial statements of PT2SB for the year ended 31 Dec 2016 imply that the capex will amount to RM7.72bn. The difference is mainly due to the strengthening of the US$, which was taken into account in the financial statements, but Dialog has opted not to change its original guidance. The higher capex figure does not reflect any cost overruns, and is commercially irrelevant to Dialog, as the leasing rates are priced in US$. While Dialog s wholly-owned subsidiary, Dialog E & C Sdn Bhd, undertook the construction of SPV1, another wholly-owned subsidiary, Dialog Plant Services Sdn Bhd, is currently the main EPCC contractor for SPV2. The EPCC contract 111

112 was awarded on the basis of a negotiated alliancing basis. This means that the project management team is a unified single entity made up of personnel from different shareholders, so that the communication and cooperation between partners can be more integrated. The net profit margin on the EPCC works is around 5-10%. SPV2 appears to be much more expensive to construct than SPV1. At an expected capex of RM7.7bn for 2.1m cbm of capacity, SPV2 costs RM3,674/cbm to build. On the other hand, SPV1 only cost RM1,923/cbm to construct, or RM2.5bn capex for 1.3m cbm of capacity. There are two reasons for this: First, because SPV2 is a dedicated facility for the Petronas RAPID refinery and the Petronas Chemicals plants, it is built to purpose. The higher capex cost is compensated by higher leasing rates. Dialog expects a project IRR of 9-10% for SPV2, which it expected to meet its hurdle rate. The other reason is that SPV2 has storage tanks for petrochemical products (in addition to storage tanks for crude oil and refined products), which are more expensive to build than the tanks for crude oil and refined products. SPV1 only has storage tanks for crude oil and refined products. Capex financing and bank borrowings Of the capex, Dialog plans to fund 70% by project-financing debt. Although the project has been ongoing for some time, the entire capex has been funded by equity injections and shareholder loans so far. The launch of the project financing was delayed as a result of the expected entry of Saudi Aramco as a 50% shareholder of the RAPID and steam cracker projects. Since Saudi Aramco is also a user of the tank terminal at SPV2, the shareholders of PT2SB decided to delay the launch of the project financing, as Saudi Aramco s emergence as a user of the tank terminal may help improve the credit rating of the SPV2 project and hence lower credit costs. We expect the bank borrowings to be repaid over 10 years. We expect the loan repayments to start as soon as the project begins commercial operations, with a grace period of between 6-12 months. As 82% of SPV1 s loans have been swapped into fixed rates as result of interest rate hedges, we expect SPV2 s loans to also be swapped into fixed rates. Figure 79: The dedicated oil and petrochemical tanks at SPV2, and the regasification plant and two 200,000 cbm LNG tanks at SPV3 SPV3 SPV1 Future phases SPV2 SOURCE: DIALOG 112

113 Capacity of 1.2bn cbm at opening in January 2019F, rising to 2.1m cbm by 2021F At the opening in January 2019F, Dialog expects SPV2 to have a terminal working capacity of 1.2m cbm, comprising: Petroleum storage: 17 tanks for feedstock and refined products, with a combined working capacity of 1.15m cbm. Six tanks allocated for crude oil storage (each with capacity of 96,000 cbm) with total capacity of 576,000 cbm. 11 tanks for refined products, comprising three diesel tanks, three gasoline tanks, three jet fuel tanks and two small slurry tanks, with total capacity of 574,000 cbm. Additional space allocated for six tanks, including two for additional crude oil storage, two for jet fuel, one for gasoline and one for slurry. Petrochemical storage: 11 tanks storing 18 different products; combined working capacity of 0.1m cbm. It includes a deepwater jetty facility with 12 berths. Vopak has guided that 1.65m cbm of SPV2 capacity is expected to be commissioned progressively between 2QCY19F and 3QCY19F, with the remaining 0.45m cbm to be added by F, in our view. We have assumed that the entire 2.1m cbm in SPV2 will be fully built-up by end-2020f. Hence, we are forecasting an average working capacity of 1.47m cbm for 2019F, rising to an average of 1.89m cbm for 2020F, and then finally the full capacity of 2.1m cbm by 2021F. Figure 80: Vopak is guiding for 1.65m cbm of capacity at SPV2 to be commissioned progressively between 2QCY19F and 3QCY19F SOURCE: VOPAK 113

114 Commercial terms SPV2 is dedicated for use by Petronas s Refinery and Petrochemical Integrated Development (RAPID), which is expected to be ready from January 2019F onwards. Petronas signed a contract with Pengerang Terminals (Two) Sdn Bhd to lease its tank terminal facilities for 25 years. We understand that SPV2 would actually start earning revenue on its Ready For Start-Up Date (RFSD) in January 2019F, even if the actual start-up of the RAPID refinery and the petrochemical plants is delayed, due to the take-or-pay clause. Revenue for SPV2 is largely fixed (based on a targeted project IRR of 9-10%), and profits will gradually rise as interest costs decline over the 10-year financing period. While SPV1 s revenue and earnings can theoretically fluctuate depending on the utilisation of the tanks and the average leasing rates, SPV2 s revenue and earnings are expected to be more stable as it is a dedicated facility. One portion of SPV2 s revenue is fixed in nature (including chargeback for the land lease rentals that SPV2 has to pay the Johor state government), and is established to enable Dialog to achieve the targeted project IRR. A smaller portion of revenue is variable in nature, and is intended to cover the variable costs of operations, like staff costs, utilities, and maintenance. The variable revenue portion is pegged to CPI. The functional currency of SPV2 is US$, since the functional currency of Petronas s RAPID refinery is also US$. 114

115 Pengerang LNG (Two) Sdn Bhd (SPV3) On 13 May 2011, Dialog Pengerang Sdn Bhd obtained the land rights and development rights from the Johor state government to develop the Pengerang LNG facilities in Phase 2 of the PDT development. Pengerang LNG (Two) Sdn Bhd (PL2SB) houses an LNG regasification plant with an initial send-out capacity of 3.5m tonnes p.a. of natural gas (or 490 mmscfd), as well as two LNG storage tanks of 200,000 cbm each. The natural gas will be supplied to the Pengerang Integrated Complex for its fuel requirements, and can also be injected into the Peninsular Gas Utilisation Pipeline System. Dialog s acronym for this company is SPV3. Shareholding structure Dialog owns a 25% interest in SPV3, with Petronas Gas holding the majority 65% and SSI holding 10%. The shareholders agreement between Dialog and Petronas Gas was signed on 14 November SSI s 10% investment was effected in September 2015 with a RM2m equity injection. Figure 81: Shareholding structure of Pengerang LNG (Two) Sdn Bhd (SPV3) Dialog has a 25% stake currently SOURCE: DIALOG Land lease duration of 65 years The land lease for SPV3 is for 65 years starting from around 2012 to 2077F, with a 34-year optional extension period to 2111F, for a total land lease period of 99 years. The land lease costs will be revised at the start of the optional extension period, to be based on the market value of the land at that point in time. Although SPV3 is expected to be ready only in December 2017F, the land lease commenced at roughly the same time as SPV1 and SPV2, as the land reclamation began at about the same time. The land lease period commenced from the time the land reclamation work began. Expected capex of RM3.7bn Dialog s official guidance for the SPV3 project capex is RM2.7bn. Dialog s EPCC arm had a small role to play in SPV3 and its scope of work was limited to the installation of the LNG jetty topside facilities. The work was awarded to Dialog Plant Services Sdn Bhd. Specialist contractors like Samsung were at the forefront of the LNG regasification terminal construction and the construction of the LNG storage tanks. However, PL2SB s audited financial statements for the year ended 31 December 2015 suggest that the capex for SPV3 could be as much as RM3.7bn. The reason for the difference is the depreciation of the ringgit relative to the US$, but it does not matter to Dialog, because SPV3 s revenues are denominated in US$. The capex is expected to be 70% funded by debt. The LNG regasification plant at SPV3, as well as two LNG storage tanks of 200,000 cbm each, can be expanded in the future. There are plans to build one 115

116 or two more storage tanks. The initial send-out capacity of the regasification facilities is 3.5m tonnes p.a. of natural gas (or 490 mmscfd), and can be increased in the future. Commercial terms Petronas Gas signed a contract with Pengerang LNG (Two) Sdn Bhd to lease the regasification terminal and the storage tank facilities for 25 years. The regasification plant in SPV3 was supposed to commence operations by end- 2017F, with the entire plant to be commissioned in one go. SPV3 owns the regasification plant, and earns a fixed remuneration fee for the services rendered in terms of importing the LNG, regasifying the LNG and delivering the gas to the users. Users include Petronas s cogeneration plant, which supplies the electricity to the RAPID refinery and steam cracker plant, as well as the petrochemical plants built within the PIPC, but the gas may also be supplied to Malaysia s gas pipeline network (Peninsular Gas Utilisation Pipeline System) for distribution across Peninsular Malaysia for power generation or industrial uses. SPV3 does not take any risk from the fluctuation in gas or LNG prices, which are fully passed on to the users. Dialog expects to earn a project IRR of 9-10% for its SPV3 investment. 116

117 APPENDIX 5: REFINERIES IN MALAYSIA Figure 82: Refineries in Malaysia (upcoming capacity highlighted in blue boxes) Name of refinery Location Capacity (bpd) Crude types refined Current and upcoming capacity Petron Port Dickson Port Dickson 88,000 Light, low sulphur crudes 62,000 Light, low sulphur crudes Hengyuan Port Dickson Port Dickson 156,000 Light, low sulphur crudes 27,000 Light, low sulphur crudes RAPID will be the single-largest refinery in Malaysia Malaysia currently has four refinery complexes. The two oldest complexes are located in Port Dickson, originally set up by Esso (ExxonMobil, XOM US, Not Rated) and Royal Dutch Shell (RDSA LN, Not Rated) in The ExxonMobil refinery was sold to Petron in 2011, while the Shell refinery was sold to Hengyuan Refining Company (HYR MK, Not Rated) in In 1982, Petronas set up the Kertih refinery in Terengganu to process the sweet crude mined offshore Terengganu. In 1993, Royal Dutch Shell started the Bintulu Gas-to-Liquids plant (also known as the Shell Middle Distallate Synthesis plant), to convert gas to synthetic petroleum products. In 1994, the first phase of the Melaka refinery was established by Petronas to process light, low-sulphur crude. The second phase was set up in 1998 and expanded in 2010, mainly to process medium-to high-sulphur crude oil. In total, the current refining capacity in Malaysia stands at 578,913 bpd of crude oil. Status Operational from Main owner Active 1963 Petron Malaysia Refining & Marketing Bhd, acquired stake from ExxonMobil in 2011 Proposed? Petron plans to spend at least US$1.5bn to expand expansion capacity of its oil refinery in Malaysia to 150,000 bpd from 88,000 bpd Active 1963 Hengyuan Refining Company Bhd, acquired the stake from Royal Dutch Shell in 2016 Proposed expansion 2018F Hengyuan Refining Company Bhd said that it will invest US$135m +/- 10% in a new 1.15m tpa Euro 4M mogas plant, expected to come on-stream by 2H18F. Kertih Terengganu 49,000 Light, low sulphur Active 1982 PETRONAS Penapisan Terengganu Sdn Bhd crudes Bintulu GTL Sarawak 14,700 Gas Active 1993 Royal Dutch Shell Melaka-I Malacca 100,000 Light, low sulphur crudes Melaka-II Malacca 171,213 Medium, high sulphur crudes Active 1994 PETRONAS Penapisan Melaka Sdn Bhd Active 1998, expanded in 2010 PETRONAS Penapisan Melaka Sdn Bhd, acquired remaining 47% stake in Nov 2014 RAPID Johor 300,000 Medium, high sulphur crudes Total 967,913 Under development 2019F PETRONAS Refinery and Petrochemical Corporation Sdn Bhd Proposed new capacity Yan Kedah 400,000 Medium, high sulphur crudes Proposed Unsure Merapoh Resources Corporation Sdn Bhd SOURCE: BUSINESS MONITOR INTERNATIONAL LTD, CIMB RESEARCH On 16 May 2017, Petron Corporation (PCOR PM, Not Rated) said it planned to spend at least US$1.5bn to expand the capacity of its oil refinery in Malaysia to 150,000 bpd from 88,000 bpd, or an addition of 62,000 bpd. On 16 June 2017, Hengyuan Refining Company Bhd said that it will invest US$135m +/- 10% in a new 1.15m tpa Euro 4M motor gasoline plant, slated to come on-stream by 2H18F. This represents approximately 27,000 bpd of processing capacity. On 3 April 2014, Petronas made a final investment decision (FID) to invest in the Pengerang Integrated Complex (PIC) in Southern Johor, Malaysia, which includes Petronas's Refinery and Petrochemical Integrated Development (RAPID) with a capacity to process 300,000 bpd of crude oil, as well as the steam cracker plant that is capable of producing 3m tonnes p.a. of petrochemicals. RAPID will be the single-largest refinery in Malaysia once completed. 117

118 Including all of the three projects above, we estimate Malaysia s total crude oil refining capacity could rise to 967,913 bpd from around 2019F, or 67% increase from the current 578,913 bpd. Will the Yan refinery project take off? On 15 July 2009, Merapoh Resources Corporation Sdn Bhd and the Kedah State Government signed a memorandum of agreement for the development of a US$10bn refinery project in Yan, Kedah. The total capacity of the refinery was expected to be 350,000 bpd, and planned for completion by The project was to involve the reclamation of offshore land totalling 340 hectares, and the use of 40 hectares of onshore land. The refinery was to import crude oil from the Middle East (primarily Saudi Arabia), process the crude into refined products and export them to China and other Asian nations. For upliftment of the refined products, a tie-up with China's state oil company, China National Petroleum Company (CNPC, Unlisted), was to have been established to market Merapoh's refinery products for a period of 20 years. CNPC was to commit to purchase 200,000 bpd for 20 years, while other buyers were to be found for the remaining 150,000 bpd of the refinery s production. Korea's SK Group of companies [under SK Holdings Co Ltd ( KS, Not Rated)], which owns one of the world's largest oil refineries, through its subsidiary SK Engineering & Construction was appointed to carry out the EPCC work for the project. Technical and financial difficulties forced a suspension of the project, but on 28 April 2014, Merapoh inked a partnership deal with Chinese state-owned China Energy Huacheng Industrial Investment Co Ltd (China Energy, Unlisted), which would have seen the latter emerge as a majority 70% equity stake owner in the Malaysian company. China Energy was to invest close to US$10bn to enable the restructured Merapoh to proceed with its plans and projects, the most immediate of which was to be the development of an oil refinery complex in Kedah. The Merapoh refinery was to have been designed to produce 800,000 barrels of throughput per day, although the initial production target was to be about 400,000 barrels. On 19 December 2016, Konsortium Petrohub chief executive officer Raja Chik Jaafar explained that it had bought Merapoh Resources Corp Sdn Bhd in November, which led to the takeover of the refinery project in Kedah. According to details from press reports: Konsortium Petrohub had appointed China-based Hainan Zhenrong Energy Co Ltd (Unlisted) as the main contractor to design and build an oil refinery facility project in Yan, Kedah worth over US$20bn. We expected to start the construction of the first refinery in February 2017, depending on the financing approvals. The first refinery would have a minimum refining capacity of 400,000 bpd when completed, Raja Chik told the press. The consortium also signed an agreement with QMIS World Trade International, which would assist the firm to raise further funds for the projects. For the first refineries, IMC London would assist with the financing, Raja Chik said, adding that IMC London comprises a group of bankers and funders based in the UK. He said the project would involve the development of the region s largest reclamation works of 8,000 acres, portside facilities and two oil refineries as part of the Sultan Abdul Halim Refinery Complex. We will import crude oil from the Middle East, Africa and South-East Asia, process it and export to China, Raja Chik said. We are unclear if the Yan refinery project has taken off, or if it will get off the ground. 118

119 APPENDIX 6: KERTIH CENTRALISED TANKAGE FACILITIES (KCTF) Dialog s first tank terminal, in Kertih The Kertih Centralised Tankage Facilities (KCTF) are held under Kertih Terminals Sdn Bhd, which is 30% owned by Dialog. Other shareholders include Petronas Chemicals Group Bhd (40%), and Vopak (30%). It is Malaysia's first dedicated bulk-chemical storage terminal. Figure 83: Shareholding structure of Kertih Terminals Sdn Bhd Dialog has 30% stake currently SOURCE: DIALOG Shareholding history In 1997, KCTF was incorporated as a JV between Dialog MCV and Petronas Chemicals together with US-based GATX Terminals [Part of GATX Corp (GATX US, Not Rated)]. Petronas Chemicals was the major shareholder with 40%, while GATX and Dialog MCV each held 30%. Dialog MCV was a 51:49 joint venture between the Dialog Group and Malaysian Capital Ventures (MCV). The shareholders of MCV at that time were Rashid Hussain Bhd, Employees Provident Fund (EPF), Singapore sovereign wealth fund GIC, and US private equity firm Hellman & Friedman. MCV exited its JV with Dialog once capital controls came into effect in 1998 in the aftermath of the Asian Financial Crisis, as Hellman & Friedman could no longer invest in Malaysia. As a result, Dialog Group took full 30% interest in KCTF. In 2001, Vopak, a Dutch oil, chemicals distribution and logistics services group, agreed to buy the Asian tank storage interests of GATX Corp. Land lease duration of 99 years The land lease is for 60 years from September 2000 to September 2060F, plus another 39 years of extension option, for a total of 99 years of land lease. The terms of the land lease during the extension period will be renegotiated prior to September 2060F, and will be based on the prevailing market value of the land at that time. 119

120 Figure 84: Bird s-eye view of the Kertih petrochemical complex, and the location of Kertih Terminals Sdn Bhd (KTSB) SOURCE: VOPAK Capex cost of RM640m Construction of the RM300m first-phase capacity began in 4QCY97, with operations beginning in 2000 (full construction completion in 2001) to serve Petronas Chemicals petrochemical plants in the area. The construction cost of KCTF was lower than expected as the cost of steel declined during the Asian Financial Crisis. The entire KCTF cost RM640m to construct. Commercial terms The users of the KCTF are linked to Petronas Chemicals, as it has petrochemical plants in Kertih. KCTF does not serve Petronas s refinery in Kertih, but only Petronas Chemicals plants in Kertih. These chemical plant users have contracted to use the Kertih facility on a take-or-pay basis for 20 years starting from 2000 until 2020F. The terms of the lease to the Petronas Chemicals Group will be renegotiated soon, as the current 20-year lease is ending in 2020F. We expect some decline in rates post 2020F. The services provided by KCTF include handling, storage and distribution of chemicals, petrochemical feedstock products, petroleum products, and byproducts of the refinery and chemical plants. KCTF has 42 tanks with 400,000 cbm of storage capacity, and the capacity to handle 3.2m cbm of throughput p.a. 120

121 Figure 85: Petronas Chemicals plants Olefins and derivatives Utilisation of the 400,000 cbm of storage capacity is guaranteed by the users at a minimum of 88%, and the 3.2m cbm throughput p.a. is also guaranteed. There are six users of the Kertih facility: Petronas Chemicals Ammonia Sdn Bhd, Petronas Chemicals Olefins Sdn Bhd, Petronas Chemicals Glycols Sdn Bhd, Petronas Chemicals Derivatives Sdn Bhd, Petronas Chemicals Aromatics Sdn Bhd, and BP Petronas Acetyls Sdn Bhd (30% associate of Petronas) Note: represents customers of Dialog s Kertih tank terminals SOURCE: PETRONAS CHEMICALS 121

122 Figure 86: Petronas Chemicals plants Fertilisers and methanol Note: represents customers of Dialog s Kertih tank terminals SOURCE: PETRONAS CHEMICALS KCTF s average revenue per cbm of capacity is much higher than those of Langsat 1 and 2, because KCTF is a specialised tank terminal catering to the chemical industry, which requires higher specifications than simple crude/clean storage tanks at Langsat and SPV1. Hence, the tank terminal at KCTF is more expensive to build and maintain than the crude/product tank terminals. In 2013, KCTF received compensation income of RM90m due to early termination of the terminal usage agreement by Vinyl Chloride Malaysia, a wholly-owned subsidiary of Petronas Chemicals. Vinyl Chloride Malaysia ceased operations on 1 January 2013 and its Kertih plants were decommissioned. Its Kertih plants had capacity to process 400,000 tonnes/year of vinyl chloride monomer (VCM) and 150,000 tonnes/year of polyvinyl chloride (PVC). A key factor behind Petronas Chemicals' decision was the vinyl business lack of integration with ethylene dichloride production. "The vinyl business has not been able to capture the full value and synergies of the group's integrated business model. Instead, the group s vinyl business is highly susceptible to the cyclicality of its feedstock market," Petronas Chemicals was reported by the press to have said. Operating and maintaining the VCM plant also required "high annual spending. The compensation amount was calculated based on the revenues previously committed by VCM, minus the replacement revenues that Dialog was able to get for the specialised tanks. Petronas Chemicals likely to continue using KCTF for the next 20 years The Petronas Chemicals plants in Kertih use natural gas (ethane) as feedstock, and the natural gas is sourced from the gas fields offshore Terengganu. They do not use naphtha as their feedstock. According to certain industry sources, the natural gas resources offshore Terengganu may be able to last another years, although we have not verified this assertion. At the minimum, we expect the gas resources to last another years, since Petronas Chemicals signed a new 20-year ethane supply agreement with Petronas, effective on 1 October The terms of the new agreement are the same as the previous contract. Also, on 3 November 2015, Petronas Chemicals at its 3Q15 analyst briefing mentioned that based on the available gas reserves offshore Terengganu today, there should be enough ethane to supply its two gas crackers at Kertih for at least the next 15 years. However, there would not be enough ethane 122

123 Figure 87: Petronas Chemicals plants at Kertih use ethane as the primary feedstock volume to supply a third gas cracker, which is the reason it made the decision to invest in new crackers at RAPID. Some level of exploration drilling offshore Terengganu may be able to extend the production from the gas fields for up to 40 years. If no further gas can be found, the petrochemical plants in Kertih may explore the option of importing ethane from the US. The ethane may be imported on very large ethane carriers (VLEC) and pumped into the pipelines at Melaka or Pengerang, for onward pipeline transport to Kertih. We believe Petronas Chemicals will resist closure of the petrochemical plants at Kertih, even if domestic raw gas runs out, because the plants are already fully depreciated. SOURCE: PETRONAS CHEMICALS 123

124 Figure 88: MARPOL Annex VI sulphur limits for marine fuel APPENDIX 7: THE IMO S GLOBAL SULPHUR CAP The implications of IMO requirements from 2020F onwards On 27 October 2016, the International Maritime Organization (IMO) announced that it will proceed with the global sulphur cap of 0.5% from 1 January 2020 onwards, for fuel burned by ships for propulsion. The current regulations require that bunker fuel burned as marine fuel be limited to a sulphur cap of 3.5%, but this will be reduced to 0.5% globally in just over two years. The changeover has significant implications for shipping companies, oil refiners, as well as tank terminal operators. S&P Global Platts issued a very interesting report on this topic in October 2016, and the commentary below uses some of the information from that report. SOURCE: PLATTS In the specific Emissions Control Areas (ECA), which currently encompass the East Coast and West Coast of the US, and Northern Europe, the sulphur cap was already reduced from 1% to 0.1% with effect on 1 January This means that ships sailing in those waters must burn ultra-low sulphur fuel oil (ULSFO) with only 0.1% sulphur content. 124

125 Figure 89: Emissions Control Areas (ECA) existing and possible SOURCE: PLATTS Outside of the ECA, the shipping industry is currently burning marine fuel oil (MFO) with a sulphur content of 3.5%. This will have to change to 0.5% by 1 January 2020F. The shipping industry has two main choices: a) continue to burn MFO with 3.5% sulphur, but install scrubbers on board the vessel to eliminate the sulphur from the emissions. b) switch to burning marine gas oil (MGO) with 0.5% sulphur. Each option has its pros and cons. Option #1: Continue to burn MFO, but install scrubbers Scrubbers are equipment that will remove the sulphur from the emissions before they are released into the environment. One of the suppliers include Wärtsilä, a Finnish corporation that manufactures and services power sources and other equipment in the marine and energy markets. The core products of Wärtsilä include large combustion engines used in cruise ships and ferries. On the negative side, scrubbers cost between US$3m-5m to install, which would be upfront capex that shipping companies incur if they choose this option. If a shipowner has 10 ships, this would cost US$30m-50m in total. There would also be time spent at the shipyard to install the scrubber, perhaps around one month. On the positive side, the price of MFO could fall significantly after 1 January 2020F, which would help shipping companies recover the upfront capex for scrubbers. According to consultancy Ensys (Unlisted), which was quoted in the abovementioned Platts report, global demand for residual fuel oil (RFO, which includes demand for MFO) is expected to fall by 44% immediately due to the collapse in demand for MFO post 1 January 2020F. This decline in MFO demand will probably be compensated by growth in demand for RFO for the manufacture of bitumen, for direct burning to generate power in the Middle East and Africa, and for the production of petcoke, which can replace coal usage in power generation. However, there is still likely to be a net decline in the demand for RFO, leading to a fall in the prices of RFO and MFO, in our view. The degree of decline in the prices of RFO and MFO would depend on the steps taken by producers to cut back on the production of RFO. 125