The shareholders agreement in October 2011 was for the establishment of a joint venture to develop Phase 3 of the Tanjung Langsat tank terminal — Langsat Terminal Three (LgT-3).
We believe the conditions that were not met were the construction of two new berths and the dredging of the berth pocket and turning basin of the port, which was to be undertaken by the port authority.
The lapse of the shareholders agreement will hit Dialog on two fronts:
(i) the engineering, procurement, construction and commissioning (EPCC) revenues arising from the completion of the tank terminals; and
(ii) recurrent earnings arising from the tank terminal JV once it is completed.
Recall that the EPCC contract for LgT-3 was estimated at RM371 million, spread out in the financial year ending June 30, 2013 (FY13) to FY14, which we are now removing from our forecasts.
Despite the loss of revenue and JV profit, we understand Dialog remains keen to develop LgT-3 as the delay is largely due to the unavailability of the infrastructure at Tanjung Langsat.
Therefore, we believe once that issue is resolved by the port authority, Dialog would again look to develop the project after securing an off-take customer similar to China Aviation Oil.
Note that in contrast to the Tanjung Langsat Terminals, Dialog itself is developing the infrastructure (berths and so on) for its Pengerang tank terminals (PTT) project.
Risks include:
(i) investment in the company does not enhance chances to secure marginal field projects; and
(ii) lower than expected earnings from the business offered by Atlas Global Oil Services Ltd.
We remain optimistic on Dialog’s long-term outlook, underpinned by its other tank terminals which would provide recurring income. Furthermore, given that there would be less EPCC work as LgT-3 is shelved, we highlight that this gives the opportunity for Dialog to undertake other third-party EPCC projects, which could carry better margins, thus implying further upside to our current earnings forecast. — RHB Research, Aug 22