Dialog’s 3QFY20 results were in line with expectations. Malaysia and JV profit drove earnings with Langsat 3 and Phase 1E terminals fully commissioned. This helped to mitigate the significantly weaker overseas performance. Malaysia revenue was down on lower MSA maintenance activities and continues to lack visibility. We raise our earnings by 2-3% and our target price to RM3.88. We maintain our Buy as we believe it will continue to benefit from high storage demand.

Malaysia Earnings Helped Support Weaker Overseas

Dialog’s 9MFY20 core net profit of RM442m made up 77%/75% of our and consensus full-year forecasts. 3QFY20 EBITDA grew 4% yoy as the new capacity from the Langsat 3 terminal came on stream, which also led to a 7ppts yoy growth in overall margins. The growth was partly negated by weaker overseas operations with a RM4.4m loss before tax booked, as compared to a RM1.5m profit in 3QFY19. Malaysia revenue declined 39% yoy due to low Master Service Agreement (MSA) maintenance activities.

JV Profit Increased With Phase 1E Start Up

JV profit rose 28% qoq to RM73m (2QFY20: RM57m). PT1SB utilization increased to near full utilization (from 80-90% in 2QFY20) on the back of rising storage demand. The remaining 430,000cbm³ of Phase 1E, which is now operating at a high 90-100% utilisation, also helped drive profit.

Revising Our Earnings to Factor in Higher Short-term Rates

We raise our FY20-21E earnings by 2-3% to factor in an incremental 15% increase in near-term storage rates on the back of current high storage demand amid the low oil price environment. We tweak our revenue lower as MSA activities were lower than anticipated, but the actual overall higher margins made up for the reduction.

Maintain Buy

We raise our target price to RM3.88 (from RM3.45) factoring in a higher valuation for its initial Phase 3 development by now assuming a 3m cbm³ capacity as compared to 2m cbm³ previously on an unchanged 60% stake. Near-term catalysts will be driven by the current high storage demand and rates. Next capacity expansion plan will likely come from the Langsat 3 terminal, from 120,000 cbm³ to 300,000 cbm³. A longer term re-rating catalyst lies on its 500 acres available for development in Pengerang.

Key downside risk to our call: lower-than-expected storage rates, and ii) delay in Phase 3 construction work and securing new offtakers.

Source: Affin Hwang Research - 22 May 2020