DIALOG GROUP BERHAD (DIALOG) 14/2/214 Financial Year: 213 3-Jun-213 Latest Quarter: 31/12/213 Price: 3.25 Stock Category: Large Capital Growing Board: Main Board FBMKLCI: NO Industry: TRADING SERVICES Sub-Sector: OIL AND GAS-ENGINEERING; Ownership: - Corporate Owned (Local) PROCUREMENT AND SVC L. C. Chong is NOT an investment advisor nor a financial advisor, and no information provided here is to be interpreted as a suggestion to buy or sell securities. All figures in thousands of Ringgit Malaysia except per share values and ratios Click here to understand definition of some financial terms Prepared by: L. C. Chong Website: http://lcchong.wordpress.com L. C. Chong Page 1 of 6 http://lcchong.wordpress.com
DIALOG GROUP BERHAD FY213 31-12-213 Latest Rolling 4 Quarter Results 8 7 6 5 4 3 2 1 3 2.75 2.5 2 1.95 2.17 1.98 2 1.5 1.5 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Turnover Net Profit EPS Revenue and Earnings 2,5 2, 1,5 1, 5 Revenue EBIT Net Income Balance Sheet 3, 2,5 2, 1,5 1, 5 Total Assets Total Liabilities Total Equity Cash Flow 4 3 2 PER SHARE VALUE (CENTS) 6 4 2-2 2 15.% 1 5.% 2 1-1 6 4 2-2 CROIC Gross Profit Margin Valuation FCF/Sales Debt Coverage (FCF) 4 3 2 1 3 2 1-1. DCF 3-Y 5-Y 1-Y Good 15% 1.65 1.79 2.3 Base 11% 1.52 1.59 1.71 Bad 7% 1.39 1.42 1.44 Ugly 3% 1.28 1.26 1.22 EY% Valuation R4Q-EPS FY14-EPS FY15-EPS Buy Under 1.5 1.67 2. Sell Above 2.89 3.22 3.85 3. 2. 1.. 8 6 4 2 ROIC Net Profit Margin Cash Conversion Cycle Debt/Equity 1 (1) Absolute P/E R4Q-EPS FY14-EPS FY15-EPS Fair Value 2.4 2.67 3.2 Buy Under 2.9 2.33 2.79 Operating Owner Earnings
Financial Highlights Performance of FY213 - Topline growth. Dialog's full year revenue expanded a massive +36.9%yoy to RM2.2b, compared with RM1.6b in FY12. The higher revenue was mainly attributable to the increasing engineering, procurement, construction and commissioning (EPCC) works at the Pengerang Deepwater Terminal in Johor. To date, Dialog has completed around 65% of the works and has set up 4 tanks on site. In addition, growth in revenue is supported by the increase in fabrication activities from the specialist products and services division. - Margin contraction. FY13 blended net margin contracted -2.2pp to 8.6% due to cost overruns experienced earlier in the financial year by plant maintenance projects undertaken in Singapore. This was caused by delays and setbacks experienced by Dialog Plant Services Pte Ltd while working on live-plants in Singapore. However, DIALOG would still stand a chance to recoup losses via variation orders to be undertaken. Losses are estimated to be around RM3m. - Revenue and net profit increased consistently. - CROIC and ROIC dropped in and 213. I think it was mainly caused by increasing liabilities, especially in borrowings. Their main spending is on "Development of tank terminals" and "Land deposits for development of tank terminals". - DIALOG is able to maintain NPM and FCF/Sales close to my benchmark, but both are not inconsistent. This is due to high CAPEX in expanding the business. - Cost of sales and services spiked up a lot from 1,441,67 () to 2,16,217 (213). I couldn't find the reason of this in the annual report. - DIALOG uses high leverage in expanding their business. They probably have sufficient free cash flow and assets to cover their debts. - They also maintained low Cash Conversion Cycle. - From to, Net Operating Cash Flow and Owner Earnings have been increasing steadily. Reason of cash flow dropped in 211 and is the investment in building tank terminals Performance as at 31-12-213 - Topline growth. Dialog's 2QFY14 revenue expanded a massive +38%yoy to RM694.2m. Accordingly, PATAMI kept pace with topline growth, increasing +39.8%yoy. - Drivers. Management noted that the increase in earnings were attributable to; i. continuing EPCC activities at Pengerang Deepwater Petroleum Terminal; ii. increased plant maintenance and specialist products & services activities; iii. other ongoing projects. - Sustained margins. 2QFY14 profit margin was the highest in five sequential quarters at 9.6%. Cumulative 6MFY14 margin also sustained in the high single-digit range although it faltered slightly in comparison with 6MFY13 profit margin. - Company bullish on future prospects. The group is bullish on the prospects of Pengerang which it currently reaping profits from EPCC works. It is also banking on growth from the upstream services, logistics services tank terminals and supply base, specialist products and services, E&C, fabrication, plant services and e-payment technology and solutions. - Upstream investments. In addition, the company noted that the redevelopment of Bayan Field by Halliburton Bayan Petroleum, a 5% owned joint venture, is progressing well on three fronts; i. the Production Enhancement activities; ii. Oil & Gas Field Development Planning; Economic Moats Economic Moats: Narrow Cost Advantage
Not available or no moat found Switching Costs - One of the main contractors in Malaysia oil field Network Effect Not available or no moat found Intangible Assets Not available or no moat found Efficient Scale - One of the main contractors in Malaysia oil field Growth Drivers & Risks/Challenges Growth Drivers
- The oil and gas sector in Malaysia is expected to remain a main growth driver for the Malaysian economy contributing some 2% of the nation s Gross Domestic Product. Out of the total cumulative amount of RM218 billion of announced ETP projects, approximately RM7 billion (32%) will be invested in Pengerang. All these translate into a robust industry outlook and more upstream and downstream opportunities for oil and gas service providers. - The entire Pengerang tank terminal for the 5-acre development includes a RM5bil oil storage facility (5 mil m3 capacity) and a RM4bil liquefied natural gas (LNG) regassification and storage facility of 72, m3. Hence, an expansion of the site acreage could result in higher gross development value for the project. - Petronas' final investment decision on the USD2bil Refinery and Petrochemical Integrated Development project, which will lead to the launch of Pengerang Independent Deepwater Terminal Phase 2. - The Pengerang Phase 1, which will have 1.3mil cu metre of tank storage capacity, is expected to have its first oil commissioning in 2Q214. We understand that the storage capacity can be scaled up by 54% to 2mil m3 if Dialog secures other off-takers for the additional capacity. - Endeavours on the upstream marginal and mature fields front - Bloomberg reported that Petroliam Nasional (Petronas) has announced that the Balai oil field has commenced production, the second marginal field to do so since the Petrofac-SapuraKencana operated Berantai RSC, which started gas production since October. Recall that Dialog has a 32% stake in the Balai marginal field risk sharing contract (RSC), together with the operator Roc Oil (48%) and Petronas Carigali (2%). - Took up a 5% equity in Halliburton Bayan Petroleum Sdn Bhd (HBP) from Asia Energy Services Sdn Bhd - progressing well on three fronts, namely the Production Enhancement activities, Oil & Gas Field Development Planning and near field prospect maturation work. These activities are expected to create robust platforms that will generate long-term sustainable income for the Group. - Construction works for Phase 1 of Pengerang CTF is ongoing with tentative completion by 1QCY14. Around 8% of customers have been secured under medium- to long-term contracts (3-5 years), mitigating concerns on capacity not being taken up. Phase 2 has yet to start despite reclamation works being almost done. Its commencement will depend on the outcome of the Final Investment Decision (FID) for Petronas RAPID project (which completion is reportedly delayed to late-217/early-218). - The completion of the DIALOG Jubail Supply Base (DJSB) in Saudi Arabia - This integrated offshore logistics hub which supports flourishing offshore oil and gas activities in the Arabian Gulf, serves to reinforce DIALOG s position bl d ff h l b d h Risks/Challenges - RAPID delay to moderately slow development at Pengerang terminal project. While the delay in PETRONAS' RAPID project is minor setback to Dialog's capacity expansion programmes for its "dedicated terminals" in Pengerang, it will continue to pursue growth should demand and opportunity for "independent tank terminals" arise. - Delays in its in-house EPCC jobs and new projects - New capex intensive projects which continue to be a drain on cashflows. Lower cash position will also yield lower interest income
Strategy My View: - Fair values: - EY%: 3.22-3.85 (I take average of EPS estimation for FY14 and FY15 from 11 analysts) - Absolute PE: 2.73-3.27 (I take average of EPS estimation for FY14 and FY15 from 11 analysts) - Based on the current price (3.25 as of 14 Feb 214), DIALOG is either overvalued or fully valued. - Positive is EPS QoQ Growth is 38%. For me, this is a buy signal. - I will consider to buy DIALOG if it drops below 3., or may be at 3. (if 3. turns out as a support). Portfolio Strategy: Lump Sum + Top Up Averaging Down Method: - Dollar Cost/Value Averaging Portfolio Execution: - Buy and Monitor BUY1;BUY3;BUY4;BUY5;BUY13 Buying Basis: EPS QoQ Growth > 15% Price is below Intrinsic Value (DCF) Price is below Intrinsic Value (EY%) Price is below Intrinsic Value (Absolute PE) Price is below Intrinsic Value (DY%) Stock price breaks out of consolidation/dip on an uptrend. Company owner/directors, and major fund institutions heavily buying SELL6;SELL8;SELL9;SELL1;SELL11;SELL12;SELL14 Selling Basis: Quarterly EPS drop for 3 consecutive months. Price has risen too far from its intrinsic value (DCF) Price has risen too far from its intrinsic value (EY%) Price has risen too far from its intrinsic value (Absolute PE) Price has risen too far from its intrinsic value (DY%) Long term trend changed from bullish to bearish Company owner/directors, and major fund institutions heavily selling Fundamental of business turns unattractive or bad (bear cases) The current price is 3% away from my average holding price. Other good reasons stated in MorningStar's article. L. C. Chong Page 6 of 6 http://lcchong.wordpress.com