Dialog’s 9MFY18 PATAMI came in above our expectation. The positive surprise was attributed to better associate/JV profits recorded. Notwithstanding the results, we believe current valuations have fully priced in the positive developments, which is trading at an expensive above +2SD its 5-year forward mean valuation (Fig 3). Nevertheless, we recommend a HOLD on the stock, taking into consideration the possibility of a potential inclusion into FBMKLCI index which might provide some support to share price. We lift our TP to RM3.25 factoring in a higher valuation for its EPCC business.

Results Above Our Expectation

Dialog reported a 3QFY18 core PATAMI of RM119.3m which brought cumulative 9MFY18 core PATAMI to RM322.8m, accounting for 80% and 76% of our and street’s FY18 estimates respectively. 3QFY18 EBITDA margin improved by 5.7ppts yoy while associate/JVs was 11.2% higher, helping to lift core profit by 45.7% yoy. Dialog also declared a 1.4sen dividend, higher compared to the 1.2sen in 3Q17.

Middle East Most Active; and Margins Improve Across Board

Middle East reported a 15.1% yoy revenue growth backed by an increased activities at Jubail Supply Base and higher sales of specialist products and services. This help offset the revenue decline from Malaysia (-3.5%), Singapore (-40.2%) and other countries (-12.1%). While Malaysia revenue declined 3.5% yoy, pretax profit jumped 28% with a 4.7ppts yoy improvement in margins contributed by better EPCC and plant maintenance work activities.

Tank Terminal Profits Surprised Slightly

Dialog’s tank terminal business, owned at the associate level, achieved a RM98m profit in 9MFY18, which surprised slightly on the upside and represented 80% of our earlier forecast. We suspect this could be due to the higher rental rates in certain periods. As such, we tweaked our FY18- 20E earnings by 4-8% to factor in the changes.

Maintain HOLD With Higher TP of RM3.25

We maintain a HOLD call on Dialog taking into consideration the likely support given a potential inclusion into the FBMKLCI index. Our TP of RM3.25 has assumed a 20 year extension on the Kertih plant which will be expiring in 3 years time, additional 570k cbm Phase 1 expansion (on top of the current 430k cbm) and potential 2m cbm Phase 3 Pengerang expansion.

Source: Affin Hwang Research - 17 May 2018