Dialog’s 9MFY20 results came within expectations led by solid core businesses performance (EBITDA: +5% YoY) and higher contributions from JV & associates (+46% YoY). The company will continue to be amongst the key beneficiaries of Pengerang’s development due to its exposure in tank terminals, EPCC and maintenance services. Earnings unchanged as results are within expectations. Reiterate our BUY rating on the stock with unchanged TP of RM3.87.

Results within expectations. Dialog reported 3QFY20 results with revenue of RM505.4m (-17% QoQ, -21% YoY) and core earnings of RM151.0m (-1% QoQ, +5% YoY), this brought 9MFY20 core earnings to RM442.0m (+12%) which accounts for 74.9%/75.2% of our/consensus full year estimates. Declared interim dividend of 1.2 sen/share (ex-date: 10 Jun; payment date: 25 Jun).

QoQ: Revenue declined by -17.5% QoQ on the back of softer contributions from Malaysia (-18.7% QoQ), Australia-NZ (-21%) and other Asia (-18.2%) in line with the shift in their revenue mix and disruptions arising from Covid-19 on work orders and workflows across (yard and construction related works) all operating regions. EBITDA declined -12% QoQ in tandem with the lower revenues across its operations (margin: +1.8ppts QoQ). Despite the weaker revenues, core earnings came in flattish (-1% QoQ) at RM151.0m thanks to stronger contributions from JV’s and associates (+28% QoQ) on higher contributions from PITSB.

YoY: Revenue declined 12% YoY on the same above mentioned factors. Despite this, EBITDA improved by +3% to RM145.9m on the back improved contributions across its terminal businesses (maiden contributions from Langsat 3 terminals) and higher O&M works YoY. Note that Langsat 3 terminals commenced full operations for its 120,000 m3 storage facility in January 2020. Consequently, 3QFY20 core earnings increased by 5% YoY underpinned by (i) better performance from its core businesses on better revenue mix and (ii) higher JV & associates contribution (+27% YoY on improved contributions from PITSB phase 1E).

YTD: Revenue declined by -9% QoQ in line with the shift in their revenue mix (in 9MFY19 revenue was largely from EPCC; however in 9MFY20 revenues are largely from plant maintenance (Malaysia revenues declined by 24% YoY). EBITDA managed to improve by +5% on improved contributions across the group’s terminal business. Consequently, core earnings improved by +12% YoY from RM394.6m despite higher depreciation (+30%) and finance costs (+10%), thanks to (i) leap in JV contributions of +46% YoY, and (ii) to a lesser extent a lower effective tax rate of 13.9% (-1.7ppts YoY).

Outlook. 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. In addition to Dialog Terminals Langsat 1 and 2 with a total capacity of 650,000 m3, Langsat 3 has commenced full operations for its 120,000 m3 storage facility in January 2020. Dialog plans to expand Terminals Langsat 3 into a 300,000 m3 storage facility, in line with their strategy to grow sustainable and recurring income.

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 - 15 May 2020