Dialog Group (Oct 27, RM2.44)
Maintain outperform with fair value of RM3.51: Management appears confident that the Balai Cluster risk service contract (RSC) will be a success. In any case, the RSC is structured such that capital expenditure for both the pre-development and development phases is fully reimbursed by Petroliam Nasional Bhd regardless of success rate, and Dialog only bears the financing risk.
Once commercial production begins, payment from Petronas will be based on the rate of actual production and include the agreed return over the project costs. It is therefore in the company’s best interests to begin producing as early as possible and at a higher production rate.
Management has guided average project internal rates of return (IRR) of 15% to 16%. We note that Dialog’s RSC appears to be different from the SapuraCrest Petroleum Bhd/Kencana Petroleum Bhd RSC, as each is negotiated individually. The Balai Cluster appears to be more gas-based.
We understand Petronas is in the process of pre-qualifying foreign oil and gas companies for 20 marginal fields, and the process is expected to close by end-CY11/early CY12.
Thereafter, the foreign companies will choose the local parties they would like to work with. Dialog is keen to participate in the next round of marginal fields, and its proposed fundraising exercise (involving a rights and warrants issue) will provide sufficient funding for the Balai Cluster and others.
Risks include the delay or cancellation of projects and higher than expected cost of development. We have lowered our weighted average cost of capital (WACC) assumptions for Kertih and Tanjung Langsat terminals to 7.2% (from 10.1% previously) after removing the risk premium ascribed to the two terminals.
Our estimated revenue per cu m assumption is reduced to RM399 (from RM479 previously) for crude oil storage at Pengerang as we had previously assumed similar storage rates against petroleum products (at Tanjung Langsat terminal). We raise our net present value (NPV) per share estimate for the Balai cluster to be in line with the company’s guided 15% IRR. Overall, there is no change to our sum-of-parts fair value estimate of RM3.51 per share.
Our meeting with Dialog gave us comfort that the company’s long-term earnings fundamentals and visibility are intact and that conservative risk management remains paramount.
In our view, the company is well-positioned for the significant growth opportunities in the tank terminal business in the region, and capacity expansion plans both in Tanjung Langsat Port and Pengerang Deepwater Oil Terminal will support near- and long-term earnings growth in spite of global economic concerns. Moreover, Dialog’s local projects secured thus far appear to be indicative of its strong link to Petronas. Maintain “outperform”. — RHB Research, Oct 27
This article appeared in The Edge Financial Daily, October 28, 2011.
Maintain outperform with fair value of RM3.51: Management appears confident that the Balai Cluster risk service contract (RSC) will be a success. In any case, the RSC is structured such that capital expenditure for both the pre-development and development phases is fully reimbursed by Petroliam Nasional Bhd regardless of success rate, and Dialog only bears the financing risk.
Once commercial production begins, payment from Petronas will be based on the rate of actual production and include the agreed return over the project costs. It is therefore in the company’s best interests to begin producing as early as possible and at a higher production rate.
Management has guided average project internal rates of return (IRR) of 15% to 16%. We note that Dialog’s RSC appears to be different from the SapuraCrest Petroleum Bhd/Kencana Petroleum Bhd RSC, as each is negotiated individually. The Balai Cluster appears to be more gas-based.
We understand Petronas is in the process of pre-qualifying foreign oil and gas companies for 20 marginal fields, and the process is expected to close by end-CY11/early CY12.
Thereafter, the foreign companies will choose the local parties they would like to work with. Dialog is keen to participate in the next round of marginal fields, and its proposed fundraising exercise (involving a rights and warrants issue) will provide sufficient funding for the Balai Cluster and others.
Risks include the delay or cancellation of projects and higher than expected cost of development. We have lowered our weighted average cost of capital (WACC) assumptions for Kertih and Tanjung Langsat terminals to 7.2% (from 10.1% previously) after removing the risk premium ascribed to the two terminals.
Our estimated revenue per cu m assumption is reduced to RM399 (from RM479 previously) for crude oil storage at Pengerang as we had previously assumed similar storage rates against petroleum products (at Tanjung Langsat terminal). We raise our net present value (NPV) per share estimate for the Balai cluster to be in line with the company’s guided 15% IRR. Overall, there is no change to our sum-of-parts fair value estimate of RM3.51 per share.
Our meeting with Dialog gave us comfort that the company’s long-term earnings fundamentals and visibility are intact and that conservative risk management remains paramount.
In our view, the company is well-positioned for the significant growth opportunities in the tank terminal business in the region, and capacity expansion plans both in Tanjung Langsat Port and Pengerang Deepwater Oil Terminal will support near- and long-term earnings growth in spite of global economic concerns. Moreover, Dialog’s local projects secured thus far appear to be indicative of its strong link to Petronas. Maintain “outperform”. — RHB Research, Oct 27
This article appeared in The Edge Financial Daily, October 28, 2011.
