Dialog’s FY19 results once again beat expectations with all time high core net profit of RM535m (+25% YoY) led by stronger core businesses and JV & associates. The company will continue to be one of the key beneficiaries of Pengerang’s development due to its exposure in tank terminals, EPCC and maintenance services. We increased our FY20-21 earnings by 2-3% respectively after imputing better margins for its core businesses. Reiterate our BUY rating on the stock with unchanged TP of RM3.87.

Results above expectations. 4QFY19 core earnings of RM139.9m (-2% QoQ, +33% YoY) brought FY19 sum to RM534.5m (+25% YoY). At 106% of our/consensus full year estimates, it surpassed expectations once again largely due to better-than expected margins for its core businesses.

QoQ: Despite revenue declined by 23% QoQ following the completion of EPCC for PT2SB, EBITDA still managed to improve by 6% on the back of better margin of other core businesses at 33.4% (from 22.2% previously). However, core earnings eventually declined by 2% on weaker JV& associates contribution (-11%; lower utilisation of PITSB) and high tax expenses (+11%).

YoY: Even though revenue dropped by 26% on similar reason, 4QFY19 core earnings increased by 33% YoY underpinned by (i) better performance of its other core businesses as evident by 16% improvement in EBITDA and higher JV & associates contribution (+63%).

YTD: FY19 core earnings improved by 25% mainly attributable to: (i) full consolidation of Langsat 1 & 2, and stronger JV & associate contribution (+32%; full contribution from PLNG2 & maiden contribution from PT2SB). This has helped to mask weaker interest income.

Crystallising Pengerang Phase 3. Dialog will continue to be one of the key beneficiaries of Pengerang’s development due to its exposure in tank terminals, EPCC and maintenance services. We expect full earnings contribution from PT2SB in FY20 regardless of any potential delay in other plants in Pengerang given that the commercial terms are structured on a take-or-pay basis. Note that Dialog’s subsidiary, Pengerang Terminals (Five) Sdn Bhd (PT5), an entity with 90:10 equity split between Dialog and Permodalan Darul Ta’zim Sdn Bhd (PDTSB), State Secretary, Johor has entered into a long term storage agreement with BP Singapore Pte Limited (BPS) to provide 430k m3 clean petroleum storage tanks services. 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 currently 73% 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 FY20-21 earnings by 2-3% respectively after imputing better margins for its core businesses.

Maintain BUY, TP: RM3.87. Post earnings adjustments, we keep our SOP-driven TP at RM3.87 as we have also updated our FY19 net debt position subsequent to this result announcement. Maintain BUY on the stock with the re-rating catalysts being the continuous earnings growth and further news flow of Pengerang Phase 3 initial investment. 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.

Source: Hong Leong Investment Bank Research - 16 Aug 2019