Dialog’s 1QFY20 results came within expectations led by solid core businesses performance (EBITDA improving by 3.5ppts YoY) and higher contributions from JV & associates (+87% YoY). 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. Earnings are unchanged as results are within expectations. Reiterate our BUY rating on the stock with unchanged TP of RM3.87.

Results within expectations. Dialog reported 1QFY20 results with revenue of RM645.8 (+44% QoQ -7% YoY) and core earnings of RM137.7m (-2% QoQ, +20% YoY) which accounts for 23%/24% of our/consensus full year estimates.

Dividend. No dividends declared in this quarter under review as expected as Dialog historically has declared dividends bi-annually (Oct & May).

QoQ: Revenue improved by 44% QoQ on the back of stronger contributions from Malaysia (+105% QoQ – plant maintenance driven) and Middle East (+14% QoQ – driven by a combination of specialist products and services). EBITDA managed to improve by +6% on stable contributions from their core operations. However, core earnings declined by 2% QoQ to RM137.7m after stripping off RM26.9m of EI’s (mainly consisting of RM28.5m fair value gain from the additional 25% equity interest in Haliburton Bayan petroleum) on higher depreciation charges (+28% QoQ) offset by stronger JV& associates contribution (+13% QoQ – Phase 2 PT2SB).

YoY: Revenue declined by 7% due to the completion of the EPCC program namely for PT2SB (in 1QFY19 revenue was largely from EPCC; however in 1QFY20 revenues are largely from plant maintenance – across Malaysia). As a result, 1QFY20 core earnings increased by 20% YoY underpinned by (i) better performance from its other core businesses on better revenue mix, evidenced by a 3.5ppts improvement at the EBITDA level and (ii) higher JV & associates contribution (+87% YoY – Phase 2 PT2SB commenced partial operation from November 2018).

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 RM1bn, which forms part of the RM2.5bn initial investment. With land reclamation currently 88% 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. Unchanged as earnings are within expectations.

Maintain BUY, TP: RM3.87. We keep our SOP-driven TP at RM3.87 and maintain our BUY call 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 projects is likely to be 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 - 12 Nov 2019