March 16, 2020 [The Malaysian Reserve] -The move by OPEC producers and Russia to raise crude oil production is set to see a higher demand for freight services and storage facilities which stand to benefit companies like MISC Bhd and Dialog Group Bhd.

MIDF Amanah Investment Bank Bhd (MIDF Research) research analyst Noor Athila Mohd Razali said Dialog is the top pick for the oil and gas (O&G) sector in anticipation the company is set to ride on fresh demand for its storage tank services to store crude oil.

“Basically, a tank farm is crude oil storage facility and the low oil price environment would not impact storage demand as crude must be stored somewhere for refineries and petrochemical plants to use later,” she said.

That said, Dialog also has contracts which will benefit the company in times like these as maintenance will need to be performed on oil production facilities regardless of the price, she added.

The only negative is that Dialog’s margins might be squeezed to reduce expenses.

MIDF Research calls a target price of RM3.83 on Dialog specifically due to its stable recurring income from its tank farm business and due to it being one of the main beneficiaries of the soon-to-be operational Pengerang Integrated Complex (PIC) maintenance, construction and modification contract awards.

The stock closed 17 sen or 5.5% higher at RM3.25 yesterday, giving it a market capitalisation of RM18.34 billion.

Dialog is a leading integrated technical service provider to the upstream, midstream and downstream sectors in the O&G and petrochemical industry.

The tank farm company’s earnings jumped 15.5% year-on-year to RM158 million in the second quarter (2Q) ended Dec 31, 2019, on higher business contributions from its businesses.

Revenue rose slightly by 0.4% to RM612.3 million from RM609.613 million in the corresponding quarter.

The company attributed its performance to Malaysian operations, which saw a higher share of profits from joint ventures and associates, terminal business and increased plant services activities “Maintenance, construction and modification services will be carried out regardless of the oil price environment. Therefore, we believe that national oil company Petroliam Nasional Bhd will remain committed to its maintenance spending in 2020,” said Noor Athila.

AmInvestment Bank Research, however, downgraded the sector to ‘Underweight’ from ‘Overweight’ with a ‘Sell’ call on Dialog.

“Even though Dialog has stable and recurring earnings profile underpinned by operation and maintenance services and their strategically located projects in PIC, the current deterioration in sentiment for the sector will still translate to substantive selling pressure.

“Hence, we have lowered Dialog’s fair value to RM2.81,” AmInvestment Bank analyst Alex Goh said.

He added that the fall in crude oil price is likely to be severe than the 2014-2017 period when Saudi Arabia waged war against US shale oil producers by pushing Brent oil price to US$26 (RM110.12)/barrel.

Public Investment Bank Research O&G analyst Nurzulaikha Azali has Dialog and Serba Dinamik Bhd as the sector’s preferred picks given their defensive and recurring income business.

“We ascribe 40%-60% discounts stock valuations due to these new operating dynamics which is likely to pressure earnings and stock prices in the near term,” she said.

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