#8 Investing Ideas – Dialog Group Bhd (KLSE:7277)
We chat with John Huo, COO of EquitiesTracker Holdings Bhd. John has a long experience in the oil and gas industry. Today, he shared with us why he thinks Dialog Group Bhd is the best oil and gas company to bet on in Malaysia.
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Disclosure: Stanley and John do not own Dialog Group at the point of the recording.
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Stanley: Okay! Welcome to another episode of investing ideas. This week, our guest is the COO of EquitiesTracker Holdings, Mr. John Huo, hello John! How are you?
John Huo: I’m fine Stanley, how are you? Very great Wednesday morning…
Stanley: Yeah! That’s right. Without further ado, right before we even get started on your great idea this week, why don’t you maybe share a little bit background about yourself, how do you get started in investing, and how do you get interested into investing and value investing in particular?
John Huo: Maybe just a little bit about my background and how I moved into investing, I’m actually an engineer by training similar to you Stanley, and I started off my career with Shell, and my job was to build oil gas facilities offshore, and particularly I found investing very intriguing, because you know when I first understood the concept and understood the meaning of value investing, I felt that it could broaden my horizon, and I mean it’s a bonus that you make money on the side of it, right! So, I was intrigued because it really broadened my horizon about how you think about things, how you look at businesses, and how entrepreneurs actually think, that was one of the main appeal for me to go into investing, and I said: Oh! Wow! I never even knew this industry existed, you know I mean I was an engineer, and I actually attended a class by EquitiesTracker, where I’m based right now, and I mean the rest is history, you know I just love investing, and I feel that with the technical background that I had, and combining with understanding businesses, it gives me some sort of an edge to understand businesses more. Yeah!
Stanley: Wow! Okay, and then definitely from what I understand, after you joined that course with EquitiesTracker, after a while you decided to have a complete career change, and joined them full-time, right?
John Huo: That’s right.
Stanley: When did that happen?
John Huo: So, I left in 2016, but I actually joined the insurance industry first, and I felt it was very complimentary, because financial planning is a lot about being holistic, and so investing is just very – it’s one part of the financial hierarchy, when I was doing insurance, I was actually asked to help train, because I had a lot of passion for teaching value investing. So, Alvin; my CEO, he actually approached me, and said that you know is there a possibility that you know I could work part time to train investors in ET, and after that you know I was invited to join them and do this full-time, which was actually my first passion in investing. So, you know like what you said a complete career switch, enjoying the ride, you know happy to be with them, and you know and growing the community.
Stanley: That’s amazing; I really commend you for your courage, in doing career switch.
John Huo: Yeah! Thank you so much Stanley.
Stanley: Yeah! Without further ado, let’s go right into your investment idea for this week, it’s a very interesting company which to be honest I don’t know much myself, but I guess based on your background, you would be quite a guru on this stock, and since they are also making quite a big splash in my hometown of Johor, and why don’t you introduced this company to our audience?
John Huo: Sure! The company we’d be talking about today will be Dialog, the stock code will be 7277 Dialog; it’s listed on the main board of Bursa Malaysia, currently their market capitalization would be about RM19.734 Billion, and they have been listed since 1996. The market cap of RM19 Billion was taken as of 5th November. One of the financial highlights about this company, their revenue grew roughly about three times over the past ten years, profit grew five times in the same period, operating cash flow grew three times, and money you know changed a little bit [Unclear 05:01] had five years of positive free cash flow over the past ten years of record history. In terms of the balance sheet, they probably have a cash to interest bearing of 80%, and cash to total liabilities about two times of what [Unclear 05:16], should I explain what they do?
Stanley: No, I just want to make a comment there. Wow! for an oil and gas company, especially the past decade hasn’t been that kind to this industry, and yet they have been able to grow such aggressively, it’s definitely quite interesting, why don’t you explain a little bit more, what does this company actually do, how do they make money?
John Huo: Okay! Good! Yeah, and that’s a very key comment, because I mean if you look at a lot of industry players in Oil and Gas, they have been badly hit, and in our explanation later, I will explain why they are so resilient. What do they do? They’re actually an engineering and technical service provider in the oil, gas and petrochemical industries. Now, their customers include multinational oil majors, national companies as well as multinational engineering and services providers located throughout the world, but mainly a big chunk of their revenues to come from Malaysia. Now, in the oil gas industry, I have to give a little bit of context, and there are actually three main categories, and these categories or segments as we call them, are broadly known as upstream, midstream and downstream. Now, allow me to clarify, you think of the upstream players, the guys who find, they drill and they produce oil and gas; the midstream players are those guys who transport, they store the oil and gas that’s being produced, and lastly the guys in downstream are the guys who actually processes or refine, the right term is going to refine this crude oil and gas into a usable product, for either the retail customer, or what we call the industrial customers. So, case in point, so for us as a retail customer, we know all of oil and gas as a ron 97, or ron 95, correct? For the industry users; they use it as feedstock for producing chemicals, for let’s say the fragrance industry, for they use gas, feedstock for ammonia, for the fertilizer industry, and last but not least there are things like wax, you know a wax to produce candles, or to produce other byproducts, all these are derived from petrochemicals, or the feedstock is actually raw crude oil & gas. So, these are the three segments. Now, Dialog happens to be an integrated service player for all three categories of segments of this, and that’s what makes it very, very resilient, they are in all the upstream, midstream and downstream, so they have a leg in everything.
Stanley: Wow! Okay, can you maybe explain a little bit about say they are in all three streams, so what do they actually do in upstream, and what are some of their businesses right now, that they have in upstream?
John Huo: I’ll give a little bit of context about how upstream business actually works, so what every nation, there’s actually a governing or regulatory body that actually owns or governs the assets; the national mineral assets of the country, now that happens to be in Malaysia its Petronas, or more specifically Petronas management unit, what they do is, they actually open up blocks of producing oil and gas assets for sale to people who want to operate it on a certain time period, this structure is known as a production sharing contract or risk sharing contract. Now, Dialog what they happen to do in upstream business is, they participate as an operator of these particular fuels for certain period 20 normally its between 20 to 25 years period of time, and they partner with other people, who are either an independent oil major or a national company to actually operate this field; for example, in Malaysia they have three fields that they hold, and they actually partner with guys like Halliburton, and also Rock oil to actually operate a particular field, for a certain period. So, how do they make money is that they pay for this field alright, there’s a cost recovery, and whatever profit they make out of their operating costs actually the profit in upstream, that’s how upstream actually make money. So, if you were to compare, you think of them like a Shell, or an Exxon, or a BP, probably a more smaller scale, because upstream business is very capital intensive you know, and you’re talking about – just recently, if you follow the oil gas news, I think was Total, they sold a particular block in Brunei to Shell, they sold 65% of the block to Royal Dutch Shell, and it costs I think 300 million US dollars, just for 65 percent of a block that has more asset yet. So, you see how much it will to cost to build the platform, to do all the other enhancements before you can actually drill the oil. So, it’s a very capital intensive business in our upstream.
Stanley: So, all the three upstream assets that they have are all almost like joint ventures and co-investment?
John Huo: That’s correct.
Stanley: Okay! And then what about their midstream, what do they do in the midstream industry?
John Huo: Yeah! So, this is where it gets interesting, so midstream is actually where there is a space where people need to transport oil, people need to store this oil for certain time period, before it gets to what we call the downstream or the refiners then to the end consumer. So, in Malaysia, what was very interesting was Dialog managed to secure a very big plot of land in Johor, and why specifically Johor, because it is at the boundary, the travel boundary or what we call a choke point between trade or transit of oil between middle east and what we call North Asia or greater Asia, and why our geographical position isn’t quite simple is because geographically it is at the South. Singapore is already into the space, in the form of Jurong Island and Bukom where they have oil and gas storage, they found a Pengerang, on this particular site that they have has a very big draft where very large tankers can actually berth. So, what they do is, they built tank pumps, or storage pumps, that acts as a transit storage point for people to actually either buy, refineries actually buy it, or actually they store it in anticipation for people to actually use it in either China or Korea in the future. So, they make money by actually charging storage fees, by charging certain value-added services like blending, or keeping cool gas, or blending certain mixtures of crude oil, and they actually charge on all these ancillary services on top of the storage charges to people who use their facility, because it’s also very capital intensive. And in this place; it’s similar to upstream, they actually partnered with global players, most of them global oil traders around the world, to build these facilities, so they participate in a partnership or joint venture, each come out with their capital, they build storage facilities, and they charge rental for the facility. So, that’s how they make money in the midstream business.
Stanley: Wow! Cool! Okay, I think we will spend a little bit more time on the midstream later on, because this is one of the main key growth driver for the company, before that, the downstream side, I can see that they have quite a number of multiple downstream businesses, but maybe just as a summary, what are some of the key things that they provide in the downstream site?
John Huo: Okay! So, as an integrated technical service provider, one of the businesses they do is this thing called EPCC; with Engineering, Procurement, Construction and Commissioning, that’s the full acronym. what they do is this, let’s just say you have an existing refinery or a plant, and every few years you need to turn off the plant to do a major maintenance, so what they do is, they have services that actually do what we call a total plant maintenance or plant turnaround, and they bring in, they put in resources like engineers, or welders, or whatever, they come in as turnkey service providers to providing services, there’s a really quite a bit chunk in downstream. The second thing is, they have this specialist product and services, like for example, they supply catalyst, which is a very specialized product used in the refinery, and some of this product, they have secured sole distributorship or sole license fee to actually operate and to provide services for this, so that also forms another channel of their business to refineries, and to downstream petrochemical plants. what was interesting was, as an oil and gas company, you wouldn’t see them earning money from IT, or digital services, now they actually have a digital technology and solutions arm, and what they do is, they develop proprietary software for either the plant that they build, but they also apparently in their latest annual report, they have secured an e-payment, an e-wallet system. So, for one of their products, IT solutions, I found that pretty interesting, so here they are probably they developed this arm to actually help their subsidiaries to develop propriety IT solutions, but they felt that wait, since we have this resources you know, can we further utilize this opportunity more, and they’ve come up with digital payment solution, which I found pretty interesting, as part of their downstream solutions as well.
Stanley: Okay! That’s interesting. There are so many oil and gas companies, especially listed in Malaysia given that the country is very dependent on oil and gas industry, in your own opinion, why is Dialog special?
John Huo: Fantastic question, actually what really caught my eye was this Stanley, I mean I’ve been in Shell for ten years, the oil and gas industry is actually very, very cyclical in nature especially the upstream players; they’re very dependent on the costs to produce oil, and the price that they can sell it for, like you know every day if you hear a business news, they say oh crude oil prices are $50, or $70, and upstream players are very dependent on this movement, because the oil cost on average can range from twenty US dollars to fifty US dollar depending on where you drill and how difficult it is to reach to the floor. Now, if there’s a downtrend in the oil and gas prices, the upstream segment normally what they do is, they stop spending because it’s very capital incentives, they stop spending to build the facilities to actually extract this oil and gas resources, and because of that, there’s less money to go around to the other players, also it’s very volatile. Now, the midstream segment is really unique because it’s less dependent on the cyclic nature of the crude oil gas prices, because if you look at the business model for the midstream players right they spend a huge capital upfront to build the storage facility, or probably in some cases in the US they build the pipe, but then that’s all, and you think of them similar to a tollgate provider, you know you drive on a toll, I mean in Singapore, you’re famous for ERP rates rise, you can’t drive through a toll and say oh today, I don’t feel like paying a toll, it’s no way, that is not going to happen. So, you think of Dialog business model for the midstream, it’s like a toll gate provider, you want to use my facility to store, or to transport oil, pay up, you know, this is a rental based on a certain charge rate, so if you think about it, it doesn’t really matter whether the crude oil price is at $50 a barrel or $70 a barrel, because I don’t care what’s the price of crude oil, my rental rate is based on the tonnage of the volume of oil you store in my facility, not so much the crude oil prices you see, and this makes very good business for oil traders, especially this is a market called oil futures trading. So, what they do is, they buy oil or they hitch oil at probably $50 a barrel, hopefully three months down the road, because of demand it’s $70 a barrel, and they arbitrage, but these arbitrage happens within a period three months right; somehow, someway, the oil needs to be stored somewhere, and this is where Dialog actually provides these kind of storage for these oil traders actually, so that doesn’t really you know impact them, because of oil gas prices. Now, downstream is a very cyclical, because the downstream players, they take raw crude oil or gas, which is the LP… but their selling price is normally especially in Malaysia and certain parts of the world is regulated. So, there’s already a cap to how much you can sell them, and when your cost is rising and your selling price is capped, you get what I call a margin squeeze, and because of these, downstream players are also very impacted by the cyclical nature of the rise and fall of the crude oil prices. So, why Dialog really is so resilient is because of this, the reason that they’re integrated; they’re in upstream yes, they’re in midstream yes, and they’re in downstream, but the midstream in a way acts as a buffer, because it is always a recurring and sustainable kind of income for them, that’s why really caught my eye, I mean if you look at most of the oil and gas players that are listed in Malaysia, they are either in upstream, midstream or downstream, actually midstream I hardly see anyone in midstream, I think Dialog, if you were to pick or to spin all these businesses, they will be the only pure playing midstream player in Malaysia. So, very interesting you’ve got tons and tons of listed companies in oil and gas in Malaysia, but most of them are in the upstream, or services providers for upstream, it is very rare find those guys in midstream and downstream.
Stanley: Wow! Amazing, if we look at this company, where are we seeing the growth potential, and maybe the growth catalyst of this company going forward?
John Huo: I think their growth catalyst is about – I need to indulge a bit of history here actually.
Stanley: Go ahead.
John Huo: Yeah! I can talk for hours on oil and gas, but I’m not going to bore you, I do need to talk a little bit because of the complexity of oil, I mean oil has always been known as black gold to a lot of economies, the black gold, and well there are a lot of up cycles, down cycles in industry right, and even this thing called a peak oil theory meaning people say ok because it’s a finite resource, when is it going to hit a peak and says there’s no more oil, that we’re going to run out of oil very soon, and that is coming fast, because there’s new technologies, new way of drilling for oil, new ways to find oil, you know that that’s peak oil theory cycle gets extended and extended. Now, the problem is this, we as a global population, as humankind, we have not really found a replacement for oil, now I’ll tell you why. You see oil as a resource permeate into every single part of life, you talk about the ear pod I’m using, it’s a form of plastic right, it’s an oil derivatives, you talk about the fuel you use in your car, it’s an oil derivative, I don’t see planes flying on – while they’ve developed solar flying planes today with electric motor, but I don’t see prevalent uses of it in probably the next five to ten years, so like it or not the human race is actually so dependent on oil, that is not going to go away in the next twenty to thirty years, all right I mean even when electric cars are coming or whatever, you still need a source of fuel to burn to generate electricity, and most of these come in from natural gas or oil. So, there’s no way you can get rid of oil, I mean even your phone, plastic materials everything is derived from oil, so…
Stanley: The source of civilization…
John Huo: Exactly, there’s no way even laptops, plastics everything, and it’s so prevalent and so ubiquitous that people don’t even realize it, now why is this important is because if you look at the nature of, or you look at it on a map, right you look at it on a map, where is the most resource heavy region in the world today, it’s mainly in the Middle East, and in Russia, and in the United States. Now, US story is for another day because they are producing so much, but they are also consuming as much. So, let’s look at where there is very high supply, but less demand and where the demand is coming from. the supply is mainly coming from the Middle East and the Russian regions, I mean we talk about countries like Kuwait, Iran, Saudi Arabia, right and the demand, the growth of demand is actually coming from the Asian Region, actually China, Korea, Japan. Now, the struggle is this, how do you get oil from the Middle East with its huge supply to where huge demand is, and most of it is actually true shipping means, you either transport it in a very big vessel, okay we call them precarious, or if you transport gas it has to be cooled down to minus 40 degrees as a liquid to make it to make a gaseous form into liquid, so that you get that kind of storage space to transport it via LNG carrier. So, there is a very key transit point around the world, and because of that then you have look at geography, now the Middle East region, there’s a lot of turmoil, there’s a lot unrest, and here we have a straight from Lanka, now if you guys follow world news probably about 3-4 months back, remember there was a lot of issues about tankers being bombed, and then Iran and US were going, and bricks had passed about who is to blame, and all that kind of thing, but what important it played for the oil gas players is this, now that area where the bombing occurred is a strait called the Strait of Hormuz. Now, the Strait of Hormuz is a very critical choke point in the world oil transit links, it transits the twenty billion barrels of oil a day, okay one day that transits the strait of Hormuz, now what does it got to do with Dialog? Now, here comes the interesting part, now strait of Hormuz, world’s number one transit point, twenty million barrels of oil a day, the Straits of Malacca is world’s number two choke point they transmit about sixteen million barrels of all day, that means that’s the amount of crude oil that is being you know shipped by tankers, so you talk about barrels of oil equivalent, so you can include gas as well LNG carriers, so this is the amount of oil being transported through the Strait of Malacca from the Middle East through the Strait of Malacca all the way to countries like Japan, Korea and China, you know so it’s a very important transit link in world geography. So, were you surprised in the short while Stanley?
Stanley: Wow! Yes, to be honest, but I always knew that you know Singapore with Jurong Island is one of the top processing areas of oil and gas in the region, but I didn’t realize that the amount oil flowing through strait of Malacca is actually that high.
John Huo: And that’s why Jurong has prospered all these while, because of these transit points. Now, if you take strait of Malacca and strait of Hormuz right both combined, it takes up 60% of world oil volume moving around 60%, it’s quite this crazy you see. Now, what we look forward to for Dialog growth catalysis data, and I need to show you some studies because maybe like some statistics about, why I see the group, now if you look at Rotterdam port, it’s a port in Holland, it is known as the world’s biggest petrochemical independent oil and gas storage in the world today, in the world. Now, Rotterdam port alone has a storage capacity of about 30 million meters cube, and it caters for the Europe population. So, Europe has roughly about 400 million kind of population base, now in Asia, our population base is roughly about 3 billion, or roughly half of the world, if we include China, and Japan, you know population base about 3 billion. Now, let’s do the math, let’s do a bit of math, Rotterdam port; 30 million to serve a population of 400 million, means 1 million meter cube of storage, is to serve roughly about 13 million people, okay follow me right, so if we use the same ratio, and we bring it to Malaysia and Singapore, right? Okay! Malaysia and Singapore combined we have about 14 million meter cube of storage, so Singapore has 10, and Malaysia has 4, and most of it is in Pengerang, the 14 million combined meter cube. Now, if we use the same ratio of 1 million meter cube of storage to serve a population of 13 million, you take the population of Asia which is 3 billion you divide it by 13, what you will get is the number of storage per meter cube of how much we need for Asia, that comes up to two hundred and thirteen million meter cube, where is Singapore and Malaysia, Singapore and Malaysia is at 14 million combined, we have a demand for 230 million storage facility, that’s a factor of sixteen times.
Stanley: Okay! No, to be fair right, to be fair, Europe is a little bit more integrated, we say like on their transportation system, and all the society, and economy. for Asia, we’re still quite diverse right, maybe is not that the assumption that just Singapore and Malaysia can be serving the entire Asian market, maybe is not that logical, maybe India or China, they will have their own storage facility, and things like that. So, would you think that’s fair, and is other country building up all their facility as well?
John Huo: Very good, I completely am in alignment with you, the reason why I did that was simplify the math, so what I was trying to show is that there is a need for 230 million meter cube of storage, and you are precisely right, Singapore and Malaysia, because of the geographical – so you see, it is a little bit funny, Europe is a big landmark, so port of Rotterdam, you’ve got your whole, you can build pipelines, you can transport your oil by tankers and all that. Asia is really unique, because Asia is a very Islanders, kind of geographical, you look at Philippines, or Indonesia you know, and that’s the reason why they need to have geographically independent storage facilities around the region, that can take up to 230, and point, we cannot be expecting Malaysia and Singapore to take up the whole, but even if you discount that right, you look at the landmass being connected, I mean this is coming ready geography. So, Thailand is connected to the peninsula, and as well as Singapore, Indonesia is separate, Philippines are also separated, China is also separated, and China is also building their own independent storage facility. So, even if we put in a discount, let’s just say even we take a quarter of 230 million right, a quarter we will be about 15 million storage capacity, 15 million. Here, we are at 14 million, so that’s where I see that growth of demand, because Malaysia’s somewhat is blessed, because of its geographical condition, we have strata in between the Straits of Malacca, in your home state of Johor, there’s a very deep porter, which we can talk about later, you see not all coastal areas can be developed into a port. So, if you understand that the depth of a porter, it plays a very important role because if you have a port that is not deep enough, the huge carriers that Dialog is serving cannot even come, because they require certain draft to allow these big carriers to be able to bunker, and to fill up the tank storage facilities. So, I mean if we’re coming back to the catalysts of growth, these are for me qualitative or even quantitative things that I see as growth catalyst for actually Dialog.
Stanley: From what you explained to me, it seems that the project at Pengerang, Johor right now, it will still be the main growth catalyst for this company, I have been to Pengerang to take a look, of course Petronas is there, and Dialog is one of the first company that has their assets ready, you know even before Petronas, situated at the east coast of Johor, and directly compete with Jurong Island in Singapore. Firstly, why don’t you share a little bit what Dialog is building up there, and will the Jurong Island be a competitor to them, or how do you see the whole relationship between Pengerang and Jurong Island?
John Huo: Fantastic question. So, Jurong and not just Jurong and also Bukom Island in Singapore, these two, so Singapore saw this vision very early, about them trying to emulate Rotterdam Port, which I explained earlier right, and what they did was actually create an ecosystem, that means you need a storage facility, but at the same time, you need the end users, which are the downstream players, the refiners. So, they encourage investments from company like Shell, Shell has one of the world’s largest refinery in Bukom Island, which is close by to Jurong, they also have attracted guys like Exxon to build a refinery there, BP to build a refinery there, and they have actually reclaimed a lot of land to actually cater for building these refineries and their storage. Now, if you look at the comparison, do I see Dialog competing against those guys? Somewhat, I would say yes, and at the same time they are complementary, Why? My thesis of investing is this, if you look at the entire value chain, are there comparisons, somewhat yes, but is the cake or the pie big enough for both these players, and I say yes. Now, to your earlier question about how much storage facility that Dialog is building, I won’t go through the more detail, but in total when Pengerang is up and running, it will come up close to four million meter cube, I think there’s still room to grow, they have not launched at a Phase three, and I see it rather than competing directly with Jurong or Bukom, I think there is enough space for both of these from Pengerang, Jurong, Bukom to coexist, because there is enough playing space for everyone, the conviction actually comes from the partnerships that Dialog has actually formed. So, Dialog has actually built tank farms or bank and also what we call Terminals, so terminals are actually you think of it like a port, but this port has to be a little bit special, because Dialog caters for larger and larger vessels. Now, I would say it’s a little bit of a long explanation for me to explain, now vessels right, they come in different sizes and concepts, and most of these vessels actually carry crude are very big, one acronym they use is this acronym called VLCC (Very Large Crude Carriers). So, what Dialog is building in Pengerang are terminals to be able to visit for Very Large Crude Carriers, they are the second largest, the biggest crude oil carriers, this thing called a ULCC (Ultra Large Crude Carriers), you cannot get any larger than that anymore. So, Dialog is building in Pengerang a terminal, they’re also building the storage, or what we call tank farms to store this oil, and how it relates to what you say of Petronas is, Petronas are actually building refineries, petrochemical complex, then use this crude oil, and use these gas, as a feedstock for the manufacturing. So, they will be producing ethylene, which is a base chemical for your perfume industry, or also your plastics industry, and all that, so you see, they are only part of the value chain, from the crude oil storage, terminal storage, to the refineries, and this way, they are – if I were to put it in brief, they are building another Jurong or another Bukom in Pengerang.
Stanley: Yep! The project that the Dialog has in Pengerang, of course is a joint venture, given that there is a – I guess huge expectation on the project, and also they have spent a lot, a huge capex on the project, how dependent do you think is your current thesis right now on the success of Pengerang?
John Huo: I look at it, as I mentioned earlier, while I you know singing a lot of songs about Pengerang, and then the growth story catalyst, I have to remind myself they are actually integrated oil and gas player. So, remember we talked about they have an e-payment system and all of that, so if you have followed their annual reports for the past few years right, one of the key things and they keep on repeating is, one of the key management KPI is actually to diversify the source of revenue. So, they’re very cognizant that not one segment of the industry can actually bring them down, and I think that comes from experience, because they are in all three segments; upstream, midstream and downstream, while Pengerang, is their biggest capex look on their cash flow, and also their balance sheet today, I would anchor it as probably 60% of the success, why? Very simple, the moment capex is spent right, and they recoup their costs on their capex. So, whatever profit they get is pure profit, probably some operating costs to maintain accessibility and all that, but it’s almost pure profit from their own you know, and they are still also getting a lot of other revenue streams from their other possible segments of the business. So, I see while Pengerang, is a big part of their growth, I don’t see them you know just because Pengerang fails, then you know, you can’t buy this company, we have to remember it is an integrated player.
Stanley: Maybe just this is my own personal opinion, but I think though the most risky part of Pengerang has actually been over, we’ve seen that the development is really still ongoing, and also Saudi Aramco has decided to join Petronas into the project, that’s definitely going to give them a big boost. Let’s talk about valuation right now, all seems good that the company is still growing, has growth potential, how do you value this this kind of company?
John Huo: Okay! So, for me, I look at it from two fronts; one is because we know that this is a very capex intensive business, and I do a very simple, what I did was I actually looked at their cash flows, operating cash flow generation, based on how much capex that spent over the past ten years. Let’s look at it, over the past 10 years, they have spent on average about between 200 million to about 400 million in kind of capex, how is it resonated in terms of operating cash flow growth? So, from 151 million in 2009 until today which is 2018, the last annual report updated is about 440 billion. So, in terms of valuation, I think they managed to grow their cash flow probably about three times, and if I look at from a news perspective, in terms of timing, there earning reoccurring prices is probably about two to three percent, and I find it on the high side, dividends are giving us probably about one 1%, 2%. So, is it is as if in terms of timing is on the high side up, but I would go back to my thesis on operating cash flow growth, I would pick a ratio of roughly, how much money they spend in terms of capex, and how much the operating cash flow growth, so I went back in time, when they were only doing – even before Pengerang, they were doing other terminals in Johor right and in Bazar, and what I found I can’t – it’s a bit difficult to verbalize, but what I found was that the amount of money they spent in capex, they actually grew the operating cash flow 50 times, for example I put in $1 that means I managed to grow my operating cash flow for $1 to $50. So, that was why I knew that they could actually really sweat their assets up. Now, every money they spend in terms of capex they really tried to you know sweat it, and grow it, and compound it, and for me I mean that’s a very simple way of valuation, rather than you know an internal rate of return, or this is somewhat of a discounted cash flow, but in very simple terms of approximation.
Stanley: Right! So, basically what we are saying is, given their good track record of being able to reinvest their capital very effectively, even though their valuation might seem slightly steep right now, you would still seriously consider this company at this point?
John Huo: Yeah! At this point, because they have a dividend payout ratio of roughly about forty percent, and so what we do as investors is that we always try to increase our margin safely by lowering our cost. So, let me use an applicable example, let’s say today Dialog as of close yesterday, was 3 Ringgit 48 cents, okay! So, let’s just say you buy today a thousand share at 3 Ringgit 48 cents right, and on average let me see what was the dividend they put the last year they paid a gross dividend about 2.2, 3.2 [Unclear 40:41]. So, on a thousand shares, you’re probably getting about 320 Ringgit, and if you had bought a thousand shares, it you would have cost you 3,400 Ringgit for example.
John Huo: So, you get 320 Ringgit from dividend okay, based on last year, so if you get 300 Ringgit every year, over the next ten years, assuming Dialog’s price does not change and does not increase or whatever, let’s just say we did five years, let’s say you get 300 Ringgit this year, next year, and the year after that, five years multiplied by 300 Ringgit, 1500 Ringgit, assuming the price don’t change in five years’ time, your costs of this one thousand shares, would have been half right, and yet the potential for Dialog will actually grow based on their track record, it’s there, but at the same time, your risk is already half, so how I counter, or how I negate you know risk of buying at this particular price, is actually trying to lower my cost, I know this is a little bit diverging into portfolio and accent management techniques, but I see because of the growth, how to actually pump some money in two it today, and try to lower your cost as you go along. As far as the story doesn’t change you know, they’ve successfully executed phase one, they’ve successfully executed phase two, and they already signed a 20-year lease with BP for phase three, and they’re looking for more partners. So, while valuation is a little bit high, is there any harm to put something today, to put a position in ,and lower your constantly go along, that’s how I would you know [Unclear 42:29] because you want you want to capture that kind of growth.
Stanley: Yep! Maybe the last question for you, just from a portfolio standpoint, you talk a little bit about how do you think about positioning this company in a portfolio, why don’t you share a little bit about your own portfolio; like a strategy and how Dialog is positioned within your portfolio?
John Huo: Okay! So, I like to have a little bit more of what we call a concentrated portfolio rather than a diverse portfolio, so maybe I put some numbers so that you guys can visualize it. So, let’s just say you have a hundred thousand in your portfolio for numerical signal falls into either calculation sake. A concentrated portfolio will have you having ten percent positions in each stock, meaning you have 100,000 you have 10,000 in stock, and your position would be roughly about 10% each. Now, if it is a diverse portfolio, you would have something like for a 100,000, you probably have a 5% or less kind of position into your stock, so you have 20 stocks into a 100,000 portfolio. Now, I prefer a more concentrated portfolio; so for a size of let’s say a hundred thousand, I will probably have ten stocks or less, and Dialog makes up probably 10 to 15 percent as a position in my portfolio, and that’s how I strategize in my portfolio. So, what I do is that, the moment it exceeds probably twenty to thirty percent, because as prices increases is the pricing in your portfolio increases, I try to limit by selling off or taking a profit, and try to move it into other undervalue counters within my portfolio. So, that I can actually write that margin of 50; so for example, if let’s say I bought Dialog and my position is roughly 10 percent, and because of increasing price it actually move to 20 percent, what I’ll try to do is, I’ll try to sell off five or more percent of Dialog, and I use that money to buy into an undervalues stock in my portfolio at that point in time. That’s how I manage my portfolio.
Stanley: Okay! Wow! Great, very detailed, thank you very much. I think definitely, this company is definitely worth a look, I might reconsider. Generally, I don’t look at oil and gas companies, but maybe you know, let’s arrange a date, and let’s go down to Pengerang together and eat the seafood as well.
John Huo: I was ironically, when I was in Shell, I was based in somewhere near Pengerang, 20 minutes away, it’s a lot of ammonia, and when I left, I already started seeing the clearing of some of the land in that area and all that, and then I can bring you the fantastic sequel restaurant I can recommend.
Stanley: Alright! Thank you so much again John, COO of EquitiesTracker Holdings Berhad. Very nice for you to spend your time, and also to share your deep research on this company. Once again, thank you very much John.
John Huo: It’s been a pleasure, thank you so much Stanley. See you.
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