Dialog’s 2QFY21 core profit of RM119.6m (-8% QoQ, -22% YoY) brought 1HFY2’s sum to RM249.0m (-14% YoY). The results came in below ours’/consensu s’ expectations, at 43%/40% of full year estimates due to lower than expected contributions from its JV & associates (-63% QoQ, -51% YoY) and EPCC income. While its recurring income stream remains strong, its EPCC revenue is ex pected to decline as phase 3Q of PCTF, SPV 5 & 6 and its 85,000 m3 Langsat 3 expansion nears completion in CY21. We cut our FY21-23F forecasts by -9.8%/-6.0%/-9.9% respectively as we factor in lower EPCC contributions going forward. We maintain our HOLD call at a lower SOP-derived TP of RM3.45.

Results below expectations. Dialog reported 2QFY21 core net profit of RM119.6m (- 8% QoQ, -22% YoY) bringing 1HFY21’s to RM251.6m (-14% YoY), which accounts for 43%/40% of our/consensus full year estimates. Results shortfall was due to lower-than expected revenue and profit recorded, attributable to lower EPCC and JV income. No dividends were declared during the quarter, none declared SPLY. 1HFY21 core profit was derived after adjusting for (i) forex gain of RM7.8m and (ii) gain on disposal of PPE amounting to RM12.0m.

QoQ: Core profit declined by 8% due to lower associate contribution, mitigated by stronger recurring business income.

YoY: Revenue and core profit declined by 43% and 22% respectively due to lower EPCC contribution and associate income.

YTD. Core profit declined by 14% YoY mainly due to lower EPCC revenue and contribution due to lower expansion works for its tank terminals.

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 3A (430,000m³) of PCTF, SPV 5 & 6 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 with regards to the PRefChem project by Petronas and Saudi Aramco. However, the commissioning of the extra capacity from the aforementioned tank terminal expansions are expected to add towards Dialog’s recurring income.

Forecast. We cut FY21-23F earnings by -9.8%/-6.0%/-9.9% respectively to account for lower than expected EPCC income.

Maintain HOLD with lower TP of RM3.45. We cut our SOP-driven TP to RM3.45 from RM4.15 previously, maintaining our HOLD call. Despite the absence of an indication towards its expansion plans due to the uncertainties surrounding the PRefChem project, Dialog’s share price has decreased by almost 20% from its peak in November 2020. While we are positive on Dialog’s growth in recurring income, we believe that the presence of strong EPCC contributions is needed to provide stronger earnings.

Source: Hong Leong Investment Bank Research - 10 Feb 2021