Dialog’s 4QFY18 core PATAMI met our expectation, growing 5% yoy, but at its slowest pace since 4QFY16. Despite consolidating 3 quarters of Tanjung Langsat’s terminal operation, FY18 revenue declined likely due to the slowdown in Phase 2 EPCC work as it gradually reaches the tail end of construction. In our view, earnings growth would see a slowdown in FY19E due to this, until the 2.1m additional capacity slowly ramps up. We maintain our 12-month target price and HOLD rating given lofty valuations; currently trading at 41x 2019E EPS.

4Q18: Rise in Margins Likely a One-off; Slowdown in Revenue

The full-year FY18 headline profit came in at RM510m (+38% yoy). After adjusting for one-offs, core PATAMI was up by a lesser 30% yoy to RM426m. While revenue declined, the improvement in margins (on higher margins from RAPID works being executed) made up for the shortfall. Dialog declared a full-year 3.2sen dividend vs. 2.7sen in FY17.

Steady Tank Terminal Business

The JV profit, where most of the tank terminal business is housed remained robust, growing 21% yoy, partly attributed to the start-up of the Pengerang LNG operations. Kertih, being a dedicated terminal, continued to enjoy full capacity utilisation by Petronas Chemical, while Pengerang Phase 1 was also fully utilised. Combined, these operations accounted for 30% of Dialog’s FY18 profit; inclusive of Langsat, the figure would be closer to 40%.

Earnings Likely to Peak in 2020E

Dialog is currently talking with potential customers for the future offtake of Pengerang Phase 3. As disclosed, the indicative investment cost for the first phase of Pengerang Phase 3 is projected at RM2.5bn, compared to the total construction cost of RM5.5bn for Phase 2. As such, earnings may decline in 2021E, due to lower construction profit being recognised.

HOLD on Valuation

We maintain our HOLD call and TP of RM3.25, which in our view fully reflects Dialog’s future growth prospects for now. Our SOP-based TP factors in a 20-year extension on the Kertih plant (expiring in the next 3 years), an additional 570k cbm Phase 1 future expansion (on top of the 430k cbm being developed) and potential 2m cbm Phase 3 Pengerang development.

Source: Affin Hwang Research - 17 Aug 2018