PP 7767/09/2010(025354)

31 May 2010
RHB Research
Malaysia Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

New s Upda te
31 May 2010
MARKET DATELINE

Dialog Group Share Price

Fair Value
:
:
RM1.04
RM1.29
Secured E&C Contract Worth SG$21.3m Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (DIALOG; Code: 7277) Bloomberg: DLG MK

Net EPS Net
FYE Turnover Profit EPS# Growth PER C.EPS* P/NTA P/CF Gearing ROE GDY
Jun (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (x) (%) (%)
2009 1,104.3 92.2 6.6 22.0 15.8 - 3.4 13.4 Net cash 22.7 3.5
2010f 1,114.5 126.0 6.4 (3.4) 16.3 6.0 4.1 14.2 Net cash 26.8 3.4
2011f 1,314.8 183.2 9.3 45.4 11.2 7.0 3.4 10.1 Net cash 32.6 4.9
2012f 1,490.6 223.0 11.3 21.7 9.2 8.0 2.8 8.5 Net cash 32.8 6.0
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC # Excl EI * Consensus Based On IBES Estimates

♦ Bags SG$21.3m contract. Dialog announced last Thursday that it had Issued Capital (m shares) 1,979.6
Market Cap(RMm) 2,058.8
received a letter of award from Chiyoda Singapore for the provision of shop
Daily Trading Vol (m shs) 2.4
fabrication and site erection of storage tanks for the Stolthaven Singapore
52wk Price Range (RM) 0.75-1.49
Development Project. The contract is worth SG$21.3m and is expected to
Major Shareholders: (%)
be delivered in Dec 2011.
Ngau Boon Keat 26.1
♦ Earnings boost from E&C. According to management, current E&C EPF
Lembaga Tabung Haji
16.5
5.7
orderbook now stands at around RM500m (vs. RM400m previously). These
include 56% of the RM600m construction value of Tanjung Langsat Port FYE Jun FY10 FY11 FY12
(TLP) project and Vopak’s terminal in Singapore as well as other smaller EPS chg (%) - - -
EPCC jobs. Management expects 50% of its current orderbook to be Var to Cons (%) 6.1 32.2 40.8

recognised in FY10 and the balance in FY11. We believe there are

PE Band Chart
significant opportunities in tank terminals projects as Malaysia will still
need to raise production volumes to meet growth in demand. As it stands,
we highlight that expansion of TLP T1 and T2 as well as Pengerang
Terminal will likely bring in more EPCC work over the next three years. PER = 42x
PER = 32x
Note that we have not factored in potential FY11 E&C revenue contribution PER = 22x
PER = 12x
from expansion of TLP T1, TLP T2 and Pengerang Terminal.

♦ Risk – sensitivity to crude oil price. Earnings growth is primarily

derived from expansion of recurrent downstream specialist services e.g.
maintenance and tankage. Any downturn in crude oil prices will likely drive Relative Performance To FBM KLCI

margin down as new jobs are priced more competitively, while any drop in
costs could lag.
Dialog Group

♦ Forecasts. No change to our forecasts as we have already assumed

RM120-150m new E&C orders per annum flowing in over the next 24
months to replenish existing ones.
FBM KLCI

♦ Investment case. We highlight the potential stronger earnings growth in

FY11-12 arising from expansion of TLP and EPCC jobs as well as sizeable
catalyst handling projects. Furthermore, we continue to like the company’s
conservative and asset-light strategy driven by strong management.
Hence, given the potential 24% upside to our fair value, we reiterate our
Outperform call on the stock with unchanged SOP fair value of
RM1.29/share based on 16x FY06/11 PER for the core operating business, Wong Chin Wai
i.e. at a premium to the sector target PER of 13x. (603) 92802158
wong.chin.wai@rhb.com.my

Yap Huey Chiang

Please read important disclosures at the end of this report. (603) 92802171
yap.huey.chiang@rhb.com.my

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Table 2. Fair Value Calculation

Fair value (RMm) Valuation basis

Core operating businesses 1,855.3 16x FY06/11 PER, premium to the target sector benchmark of 13x
Add: Kertih NPV (30%) 362.9 DCF based on WACC of 14.5%
Add: TLP CTF NPV DCF based on WACC of 15% including additional risk premium for start-
330.1 up risks
Add: Net debt FY10 0.3
Total (RMm) 2,548.6
Fair value (RM/share) 1.29
Source: RHBRI

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

FYE Jun (RMm) FY09 FY10F FY11F FY12F FYE Jun FY10F FY11F FY12F
E&C 441.9 225.0 100.0 75.0 EBITDA margins (%)
Specialist services 369.2 422.3 495.3 581.3 E&C 6.0 6.0 6.0
Plant maintenance svs 241.5 289.8 362.2 434.6 Specialist services 10.3 10.3 10.3
Catalyst handling 47.7 107.3 144.5 187.0 Plant maintenance services 15.7 15.7 15.7
TLP CTF - 70.2 212.7 212.7 Catalyst handling 20.0 25.0 30.0
Turnover 1,104.3 1,114.5 1,314.8 1,490.6 Overall 15.8 21.9 23.4

EBITDA 110.2 176.6 288.3 348.2 Tanjung Langsat Port CTF

Margin (%) 10.0 15.8 21.9 23.4 - T1 capacity ('000 m3) 132 400 400
Depreciation (16.1) (48.5) (48.9) (49.3) - Rental/m3 (RM) 531.7 531.7 531.7
Interest inc./exp. (1.1) (3.3) 1.5 8.5
- Kertih (30%) 30.5 34.2 37.6 36.7 Source: Company data, RHBRI estimates
Pre-tax profit 123.5 159.0 278.5 344.2
Taxation (22.2) (25.0) (48.2) (61.5)
Effective tax rate (%) 19.0 20.0 20.0 20.0
Minorities (9.2) (8.1) (47.1) (59.7)
Net profit 92.2 126.0 183.2 223.0
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

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Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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