September 26, 2024 [The Star]- Petroliam Nasional Bhd’s (PETRONAS) decision to develop a biorefinery plant in the Pengerang Integrated Complex (PIC) with partners Enilive S.p.A. and Euglena Co Ltd announced in late July is likely to spur the expansion of oil and gas services company Dialog Group Bhd’s tank terminal facilities.
AmInvestment Bank Research (AmResearch) said in a report that Dialog would likely be awarded the contract to build the tank terminals the latest by the fourth quarter of 2026 (4Q26) assuming a construction period of 18 months.
Under Budget 2024, the PIC was proposed as a hub for the chemical and petrochemical industries that AmResearch believes will be given a boost from measures that come under the Johor-Singapore Special Economic Zone.
“We believe this will occur through expansion of Pengerang Terminals Two (PT2SB) – a dedicated terminal for PETRONAS’ Refinery and Petrochemicals Integrated Development complex. Recall that PT2SB still has sufficient buffer land of 104 acres for additional development,” it said.
The research house has maintained a “buy” call on Dialog with a sum-of-parts-based fair value of RM2.95 a share, which implies one-year forward price earnings ratio of 27 times or 8% above its 10-year average of 25 times.
“We double down on our long-term sanguine view on Dialog and continue to advocate the stock as an undervalued asset play,” it said, adding that the stock currently trades at a financial year ending June 30, 2025 (FY25) price earnings of 19 times versus its 10-year average of 25 times.
Viewing the project positively despite the minor impact to the company, it said this would be broadly in line with the company’s ongoing approach for Dialog Terminals Langsat 3 and climate change strategy, which aims to grow revenue exposure in the sustainable and renewables sector.
It expects the PETRONAS biorefinery plant to start construction in 4Q24 with a target completion date in the second-half of 2028. “The plant will have the capability to process 650,000 tonnes per annum (tpa) of raw materials to produce sustainable aviation fuel and other biofuels such as renewable diesel/hydrogenated vegetable oil.”
While not expected to contribute to FY26 earnings, the research house estimates pointed to a 1% accretion to Dialog’s sum-of-parts premised on tank terminal capacity of 180,000 m3 based on storage size of 650,000 tpa, capital expenditure of RM300mil to be financed through a 70:30 debt-to-equity structure at a weighted average cost-of-capital of 7%, take-or-pay arrangement for 20 years at storage rates of RM27/m3-RM30/m3 per month and, internal rate of return of 11% with payback of eight years.
It expects net gearing to increase by 2.8% to 14.4% in FY27 but stay broadly within comfortable levels as the company’s financing commitments remain limited.
It added that while the net gearing impact would be minor due to Dialog’s large asset base, there could be a slight further upside should the terminal incur a lower tax rate or receive investment tax allowances. “Nevertheless, our analysis imputes a 24% corporate tax for prudence.”
