Dialog’s 9MFY19 results were above expectations with better-thanexpected margins on cost savings following completion of the Pengerang Deepwater Terminal Phase 2 (PDT2) EPCC works. JV profit also surprised on the upside with the early commissioning of the second phase of PDT2 partly contributing to a full quarter, on top of first PDT2 phase full-quarter earnings. We upgrade Dialog to a BUY as the new capacity currently undergoing commissioning would likely lift earnings in the coming quarters (FY20).

Positive Surprise From Margins and JV Profit

9MFY19 revenue fell 23% yoy to RM1.9bn mostly due to completion of the PDT2 EPCC works. However, the 8ppt increase in EBITDA margin on the cost saving from the completion and surge in JV profit (+32% yoy) helped lift the core net profit by 23% yoy. Overall earnings were above our and consensus forecasts, accounting for 85% of our full-year estimates.

Raising Our Forecasts – Lower Tax, Higher JV and Margins

With the stronger-than-expected results, we raised our earnings forecasts by 12%-13%, imputing a stronger JV contribution on an earlier commissioning of PDT2. We estimate that annual PDT2 earnings contribution would be around RM80-95m. We also factored in a 1% improvement in the EBITDA margin to reflect the cost savings and lower our effective tax rate from 18% to 15%.

Upgrade to BUY With Higher RM3.50 Target Price

We expect the progressive commissioning of Phase 1E (between June and Sept-19) and Langsat 100k m³ (by 3QCY19) to enhance earnings in the coming quarters. Moreover, with the commencement of Phase 3 construction and land reclamation works approaching completion by end- 2019 (now at 62% completion), we believe that more potential newsflow would lead to a re-rating. We raise our SOP-based 12-month target price to RM3.50 (from RM3.17) post the earnings revisions and rolling forward our valuation horizon, which implies a 33x FY20E PER (+1SD of its 5-year mean). Current valuation looks appealing given the company’s expected growth in the coming year hence we upgrade Dialog to a Buy.

Source: Affin Hwang Research - 15 May 2019