Maintain Outperform on Dialog

(http://www.theedgedaily.com)

RHB Research expects Dialog Group Bhd to experience significant organic earnings growth in FY09 to FY10 due to the global advanced catalyst handling expansion to the US and Europe, and the company’s Tanjung Langsat Port tankage project.

The research house has raised its earnings per share (EPS) forecasts for Dialog by 8.5% for FY08 and 3.2% for FY09, factoring in better-than-expected recovery in margins.

It said Dialog’s 3QFY08 net profit of RM22.3 million was above its expectations, driven by growth contributions from engineering, procurement, construction and commissioning (EPCC) contracts plus growing profit from the advanced catalyst handling business.

Dialog’s overall net profit of RM59.2 million for the nine months accounted for 82% of RHB Research’s full-year forecast.

“Profit margins continued to improve, since the jump in 1QFY08, indicating that staff costs are not rising faster than profits (which was an issue between 2QFY07 and 4QFY07 as the company went on an aggressive hiring programme for its new businesses), and revenue mix has improved due to contribution from higher-margin businesses including catalyst handling,” it said.

The research house said Dialog was still beefing up its technical staff from the current 1,200 for its catalyst handling and tankage businesses, implying potential further increase in staff costs in FY09 to FY10.

RHB Research, however, said the impact would be mitigated as greater profit starts to flow in from these businesses.

On the company’s contracts, the research house said the Sabah Oil and Gas Terminal (SOGT) project that was still pending could potentially be more lucrative than the RM1.6 billion Sabah Sarawak Gas Pipeline that the Dialog consortium was awarded, given its expertise in building tank terminals.

Maintaining its outperform recommendation on the stock at RM1.52 with a new sum-of-parts fair value of RM2.36, it advocated a longer-term position on the counter, given FY10 price earnings ratio (PER) drops sharply to 9.5 times on 66% 3-year EPS compound annual growth rate (CAGR).

“Dialog is conservatively run, has an asset-light business strategy and proven long-term earnings track record,” it said.

“With only four years to go to the 2012 US$100 million (RM325 million) revenue target for the advanced catalyst handling business, there is potential for earnings disappointment. In addition, Dialog’s drilling fluids business is subject to drilling activity and thus to the crude oil price,” it said.

Meanwhile, OSK Research maintained its buy recommendation on Dialog with a target price of RM2.35, and said the counter remained one of its top picks in the oil and gas sector.

“(The) catalyst that we are looking forward to is the materialisation of another tank terminal either overseas or for the Tg Langsat land. Our target price has already factored in the additional value from the third tank farm. Its catalyst handling business is also expected to creep up to US$100 million by 2012 from less than US$15 million currently,” it said.

The research house said Dialog’s earnings before interest, tax, depreciation and amortisation (Ebitda) margin continued to improve, reaching 10.8% versus 9.8% in the preceding quarter.

“This was largely attributed to the better margin from the Malaysian operations. Margins for overseas dropped slightly, and we think this may have been due to some start-up costs arising from overseas acquisitions,” it said.

OSK Research said revenue and profits for the Malaysian operations grew 131% and 360% year-on-year, driven mainly by more EPCC contribution from the construction jobs such as the RM600 million Tg Langsat tank terminals.

“Current EPCC order book stands at RM1.4 billion. Going forward, we see business from all segments including EPCC and catalyst handling to grow, particularly when the construction for Sabah Sarawak Gas Pipeline project kicks off.”

“As for the SOGT project, Dialog is also one of the front runners. The project is estimated to worth close to RM2 billion. The award of contract is likely to be announced towards the end of this year due to delays in the announcements of some fabrication contracts by Petronas year-to-date,” it said.

At the close of yesterday’s trading, Dialog rose four sen to RM1.56.