Dialog’s 1QFY21 core profit of RM129.4m (-17% QoQ, -6% YoY) came in below ours’ and consensus’ expectations, constituting 19% and 20% of our/consensus full year estimates despite higher contributions from its JV & associates (+40% QoQ, +31% YoY). The lower than expected profit was attributable to lower EPCC and upstream revenue. While its recurring income stream remains strong, its EPCC revenue is expected to decline as phase 1E expansion of PITSB nears completion (by end of FY21). We cut our FY21-22F forecasts by -14.8%/-10.0% respectively to as we factor in lower EPCC contributions going forward. Downgrade our call from a Buy to a HOLD with a target price of RM4.15 based on SOP.

Results below expectations. Dialog reported 1QFY21 results with revenue of RM331.7m (-39% QoQ, -49% YoY) and core earnings of RM129.4m (-17% QoQ, -6% YoY), which accounts for 19.2%/19.9% of our/consensus full year estimates. Results shortfall was due to lower-than-expected revenue and profit recorded, attributable to lower EPCC and upstream revenue. No dividends were declared during the quarter, none declared SPLY. 1QFY21 core profit was derived after adjusting for (i) forex gain of RM5.2m and (ii) gain on disposal of PPE amounting to RM12.0m.

QoQ: Revenue and core profit declined by 39% and 17% respectively due to lower EPCC and upstream revenue, mitigated by stronger associate contribution (+40% QoQ).

YoY: Revenue and core profit declined by 49% and 6% respectively due to lower EPCC revenue as Phase 1E of PITSB nears completion and lower oil prices from its upstream segment.

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. In addition to Dialog’s 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. Dialog has not announced its expansion plans post phase 1E PITSB (430,000m³) and Langsat 3 (85,000m³), which is a leading indicator towards lower EPCC revenue in the near future . While Dialog still possesses ample land for expansion, we believe that it will slow down on the expansion of its tank terminal business after the aforementioned expansion projects are completed due to the current uncertainty in the O&G market. However, the commissioning of the extra capacity from the expansion of PITSB and Langsat 3 is expected to add towards Dialog’s recurring income.

Forecast. We cut FY21-22F earnings by -14.8%/-10.0% respectively to account for lower EPCC and upstream contribution.

Downgrade to HOLD, TP: RM4.15. We cut our SOP-driven TP to RM4.15 from RM4.23 previously, downgrading our call from a Buy to a HOLD. While we are positive on Dialog’s growth in recurring income, we believe that the presence of strong EPCC contributions are needed to provide stronger earnings.