Dialog’s 1HFY20 results came within expectations led by solid core businesses performance (EBITDA improving by 2.3ppts YoY) and higher contributions from JV & associates (+60% 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 2QFY20 results with revenue of RM612.3 (-5% QoQ, flat YoY) and core earnings of RM153.2m (+11% QoQ, +12% YoY), this brought 1HFY20 core earnings to RM290.9m (+16%) which accounts for 49.2%/49.3% of our/consensus full year estimates.

QoQ: Revenue declined by 5% QoQ on the back of softer contributions from Malaysia (-18% QoQ) and Middle East (-12%) in line with the shift in their revenue mix. EBITDA managed to improve by +13% on improved margins across its operations (+4.4ppts QoQ). Consequently, core earnings improved by +11% QoQ to RM153.2m after stripping off RM5.0 m of EI’s (mainly consisting of FX gains).

YoY: Revenue came in flattish at registering a growth of 0.4% YoY. EBITDA improved by +3% to RM165.6m on the back of better operating margins from plant maintenance (+0.7ppts YoY) due to the shift in revenue mix. Despite higher depreciation charges (+43%), 2QFY20 core earnings increased by +12% YoY underpinned by (i) better performance from its other core businesses on better revenue mix and (ii) higher JV & associates contribution (+40% YoY – Phase 2 PT2SB).

YTD: Revenue declined by 3% QoQ in line with the shift in their revenue mix. Recall that in 1HFY19 revenue was largely from EPCC. However in 1HFY20 revenue were largely from plant maintenance; Malaysia revenues declined by 17% YoY. EBITDA managed to improve by +7% on improved margins across its operations (+2.3ppts YoY). Consequently, core earnings improved by +16% YoY from RM251.2m thanks to (i) a leap in JV contributions of +60% YoY, (ii) lower finance costs (-21% YoY due to the capitalization of parts of the tank terminal development costs) and (iii) a lower effective tax rate of 13.8% (-2.7ppts YoY).

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) has completed the land reclamation as at 2Q20. Construction is still on target for completion by 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.

Source: Hong Leong Investment Bank Research - 14 Feb 2020