KUALA LUMPUR: CGS-CIMB Equities Research has a sum-of-parts value for Dialog Group Bhd at RM5.23 compared with its current share price of RM2.93 as the market is undervaluing the technical service provider in the oil, gas and petrochemical industries.
It said on Wednesday the RM2.66 was for the existing terminals (Kertih, Langsat, Pengerang SPV1, SPV2 and SPV3) and currently under-construction terminals (the BP Singapore terminal at Pengerang SPV5), as well as Dialog’s upstream and downstream businesses.
The RM2.57 was for the potential future developments at the remaining land at Pengerang, which we expect to be able to accommodate a further four giant phases.
“At Dialog’s current share price of RM2.93, the large majority of Dialog’s future Pengerang developments have not been priced in, and so we think the market is undervaluing Dialog, ” it said.
However, CGS-CIMB Research said the market may be reluctant to price this in until there is more concrete evidence of future development at Pengerang, which is understandable.
“From our perspective, we have chosen to adopt a long-term and holistic view of Dialog’s prospects, which are bright, especially at Pengerang.
“Our DCF valuation of Pengerang’s long-term expansion in four separate phases assumes that the first of these four phases will be commissioned in FY26F, followed by one additional phase every five years, i.e. in FY31F, FY36F and FY41F.
“We believe this gives enough lead time for these projects to take off. With the current glut in oil production, there may be more urgent demand to build storage terminals, ” it said.
CGS-CIMB Research said at the same time, the collapse in oil prices, compression in refining margins, and the poor petrochemical selling prices, may cause oil majors and petrochemical companies to think twice about investing in expensive downstream refining or petrochemical facilities.
“However, we do not expect low oil prices to last forever, based on the lessons from the 2014-16 experience.
“Furthermore, we understand that Petronas Chemicals is planning to build one or more specialty chemical facilities at Pengerang.
“Potential re-rating catalysts for Dialog include Dialog’s robust earnings stability, which should ensure stock outperformance against the weakening FBM KLCI, ” it said.
However, downside risks include the potential for a delay in the final commissioning of Petronas and Petronas Chemicals’s Refinery and Petrochemical Integrated Development (RAPID) Project and petrochemical facilities at Pengerang, due to the explosion on March 15,2020 at the refinery’s diesel hydrotreater facility.
This was the second explosion, with the first incident at the refinery’s atmospheric residue desulphurisation unit in April 2019.
The latest incident is regrettable as it caused loss of life, just as the refinery was entering its final commissioning and testing phase and was already stabilising.
Dialog’s 25%-owned Pengerang SPV2 terminal is an industrial terminal catering exclusively to the RAPID refinery and petrochemical plants.
Pengerang SPV2 is already earning good profits as it is a “take or pay” terminal which the Petronas group is liable to pay for even if the RAPID facilities are not fully operational.
However, Pengerang SPV2’s earnings can only reach its full potential when the RAPID refinery and petrochemical plants are fully operational.