AMRESEARCH is maintaining a hold on Dialog Group Bhd at RM1.20 and a fair value of RM1.21 pending a company visit, and is positive on news that the company’s joint venture with the Johor state government to develop an independent deepwater petroleum terminal in Pengerang, Johor.

The research house said given the lucratic business of tank terminals, strong cash flow contributions should continue to underpin its dividend payout policy of 40%-60% of its earnings.

It said Dialog currently traded at around 18 times its calendar year earnings per share forecast, which is a premium compared to its peers average of 12 times earnings.

“We believe this is justified given 80% of its earnings are driven by its recurring income businesses and its net cash position (as at end of March of RM112 million),” AmResearch said in a report yesterday.

The proposed deepwater terminal will be built at a cost of over US$1 billion (RM3.53 billion) on a 200 hectares piece of land, with total storage capacity of four million to five million cubic metres. It will be undertaken by a special purpose vehicle (SPV) in which Dialog will have 90% equity and the remainder held by the Johor State Secretary.

Dialog group’s current tank terminal in Kertih and its centralised tankage facility in Tanjung Langsat — once completed by year-end — have individual storage capacities of only 400,000 cu m.

AmResearch said Dialog’s stake could be reduced as it would seek multinational corporations to jointly build, own and operate the terminal in a similar structure to Kertih where it had been operating a terminal for 10 years (out of a 20-year concession).

“We understand it would cost 30%-50% more than the normal above-ground facilities. This terminal would be able to cater deepwater tankers such as very large crude carriers (VLCCs) as Pengerang’s water depth is more than 26m,” the research house said.

AmResearch added that Kertih contributed about RM30 million of annual recurring associate income while Tanjung Langsat, once it was fully operational, should provide similar contributions to the group.

“We have not factored in anything to our earnings forecast for the Pengerang project, given it is still in the early stage,” it added.

Meanwhile, RHB Research Institute Sdn Bhd said while Dialog was both contractor and operator for the Kertih and Tanjung Langsat terminal projects, it would likely own and operate the Pengerang terminal given that the project was based on build-own-operate basis (versus Kertih and Tg Langsat, which are on a build-own-operate-transfer basis).

RHB Research said while premature to talk about earnings, for the engineering procurement, construction and commissioning (EPCC) portion based on an RM800 million contract spread equally between FY2010 and FY2012 and EBITDA margin of 5%,  FY2010-2012 earnings per share forecasts for Dialog could be enhanced by 5.8%, 4.4% and 3.3%, respectively.

“On this basis, our sum of parts fair value which is based on 16 times CY2010 PER would rise to RM1.62 per share, from our current official estimate of RM1.52 a share,” the research house said.

Furthermore, assuming the operating profits are similar to that of Tg Langsat Terminals, it estimated a potential further 13.5% boost to its FY2012 EPS forecasts.

RHB Research said although Dialog would be trading at PERs of 12.1 times and 9.2 times FY2010-2011 respectively (vs average sector PER of 9.9 times and seven times) after factoring in the EPCC earnings plus the recurrent operating earnings from Pengerang facility, the company’s reliable management, robust balance sheet and strong core divisions, remained compelling reasons to price in the longer-term earnings growth.

Hence, RHB Research reiterated its outperform call on the stock with an unchanged sum of parts fair value of RM1.52 a share which is based on 16 times CY2010 PER, a premium to the sector target PER of 13 times.