Tuesday, July 19, 2011

Dialog buys 51% stake in Anewa

Dialog Group Bhd
(July 15, RM2.59)
Upgrade to buy at RM2.61 with target price of RM2.94: Dialog announced on July 14'' that'' its wholly-owned subsidiary,'' Dialog Systems (Asia) Pte Ltd, has proposed to acquire a 51% stake in Anewa Engineering Pte Ltd, India, for 117.2 million rupees (RM7.9 million).'' The sellers, the founders of Anewa, will retain the remaining 49% stake. The acquisition will be financed by internally generated funds and/or borrowings and is expected to be completed by end-August.

Incorporated in 2006, Anewa is an engineering, design and consultancy company, servicing the oil and gas, petrochemicals, refinery, chemicals and power plant sectors. Its customers are mainly multinationals in India, the Middle'' East and Southeast Asia. According to the company's website, some notable names like UK-listed Petrofac, Italy's Saipem, Technip India and US-based J Ray McDermott are on its list of clients. Anewa employs about 120 people.

India is one of Dialog's traditional markets in the sale of specialist products and services. Cooperation with local partners'' might enhance Dialog's position there and provide opportunity to access Anewa's customer network. Management also indicated that the deal will strengthen Dialog's engineering capabilities through access to Anewa's skilled and experienced manpower. We understand that Dialog is eyeing India as its potential market for catalyst handling services. Revenue generated from the division was about US$14 million (RM42 million) and management has an ambitious target of achieving US$100 million in five years.

Details of Anewa's financial performance were not disclosed. However, judging from the fact that Anewa's net asset value was 39.2 million rupees as at March 2011 and the original cost of investment was about 4 million rupees, we believe the'' company is growing. However, compared with Dialog's net profit of RM118 million in FY10, we reckon the earnings contribution if any is negligible.

Dialog's share price has retreated by 9.4% from its recent high of RM2.88. Given the potential upside is now +14.5% (rounding up will be matching our 'buy' definition of more than 15% total return), we are raising our call for Dialog to 'buy'. Target price remains unchanged at RM2.94, based on 30 times 2012 price-earnings ratio, which is a 10% premium'' to its upper band of its three-year historical PER band. Future earnings catalysts include the Tanjung Pengerang (TP) development and potential marginal oilfield contracts. To recap, Dialog was awarded RM1.9 billion engineering, procurement, construction and commissioning jobs for TP in early June. FY12F earnings growth is estimated at +32.8%. ' MIDF Research, July 15

This article appeared in The Edge Financial Daily, July 18, 2011.

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