Dialog’s 9MFY19 results beat expectations with all time high core net profit of RM394m (+22% YoY) led by stronger core businesses and JV & associates. Meanwhile, Dialog also kick started the construction of first Pengerang phase 3 upon locking in long term agreement with BPS to offer 430k m 3 clean petroleum storage tanks services by mid-CY21. Post earnings upgrade, we reiterate our BUY rating on the stock with higher TP of RM3.80 (from RM3.76).

Results above expectations. 9MFY19 core net profit of RM394.6m (+22% YoY) came above expectations at 85%/84% of our/consensus full year estimates. The positive deviation largely stemmed from stronger than expected core businesses as well as JVs & associates.

Dividends. Declared interim dividend of 1.5 sen/share (ex-date: 13 Jun; payment date: 14 Jun) (vs. 1.4 sen in 3QFY18).

QoQ: Revenue managed to improve by 4% QoQ but EBITDA declined by 12% as a result of lower margins. We suspect this could be due to pick up in other projects for EPCC and fabrication arm which typically fetches weaker margins. Despite so, 3QFY19 core earnings improved by 5% to RM143.4m on the back of stronger JV & associates contribution (+40% QoQ; led by full contribution of PT2SB) and lower tax expenses (-23%).

YoY: Even though revenue dropped by 27% following the tail end of EPCC of PT2SB, 3QFY19 core earnings increased by 21% YoY underpinned by (i) cost savings realised on the completed projects and higher JV & associates contribution ( (+80%).

YTD: 9MFY19 core earnings improved by 22% mainly attributable to: (i) full consolidation of Langsat 1 & 2, and stronger JV & associate contribution (+32%; full 9- month contribution from PLNG2 & maiden contribution from PT2SB). This has helped to mask weaker interest income.

Announcing first project of Phase 3. Separately, Dialog’s subsidiary, Pengerang Terminals (Five) Sdn Bhd (PT5) has entered into a long term storage agreement with BP Singapore Pte Limited (BPS) to provide 430k m3 clean petroleum storage tanks services. PT5 is an entity with 90:10 equity split between Dialog and Permodalan Darul Ta’zim Sdn Bhd (PDTSB), State Secretary, Johor. Together with the common tankage facilities and jetty 3, the total capex is estimated at RM1.0bn, which forms part of the RM2.5bn initial investment. With land reclamation is currently 62% complete, Dialog has started the construction with completion date expected in mid CY21. We are projecting PT5 to contribute net profit of c.RM40m/annum starting from FY22.

Forecast. We increased our FY19/20/21 earnings by 9%/2%/2% respectively after imputing higher contribution from its core businesses and JV & associates (led by PT2SB).

Maintain BUY, TP: RM3.80. Assuming project IRR of 15%, the first phase 3 project is likely to worth RM0.06/share in our SOP valuation. Despite the 90% equity stake for first project being higher than our estimates (ranging from 25%-45%), we are keeping our Pengerang Phase 3 valuation of RM0.56/share as a whole at this juncture pending for further agreements with other clients. Post earnings adjustments, we reiterate our BUY rating on the stock with higher TP of RM3.80 (from RM3.76), based on our Sum-of-Parts (SOP) valuation. The re-rating catalysts will be continuous earnings growth and further news flow of Pengerang Phase 3 initial investment.

Source: Hong Leong Investment Bank Research - 15 May 2019