Period  2Q15/1H15

Actual vs. Expectations  Core 2Q15 net profit came in at RM76.4m, bringing its cumulative 1H15 core net profit to RM126.3m. This is within our, and consensus, forecast, at 50.8% and 49.5%, respectively. Our core net profit forecast excluded RM23.4m gain on disposal of other investment and RM20.0m write-off of non-recoverable cost in upstream activities.

Dividends  None was announced this quarter; within our expectations as DIALOG typically announces dividends only in the latter part of the financial year.

Key Results Highlights  In 2Q15, core net profit gained 15.0% despite a 17.8% drop in revenue YoY, primarily driven by better margins from the Middle East contributions in the quarter compared to the previous year and Singaporean operations turning a profit of RM1.4m from a loss of RM0.9m in the corresponding period last year.

 Core net profit surged 53.0% QoQ, mainly underpinned by higher JCE contributions (core contribution of RM13.8m once RM20.0m write-off is excluded) and better operating margins for the Middle East operations.

 For 1H15, core net profit surged 10.7% YoY on the back of better overall earnings from its Singaporean operations and maiden earnings contribution from its Middle East operations in FY15. Meanwhile, group top line dropped YoY due to the high base effect created in FY14 when EPCC revenue for Pengerang Deepwater Terminal Phase 1A and 1B were recognised.

Outlook  Pengerang Terminal Phase 1 will soon be running at full-steam with Phase 1A and 1B commencing operations and 1C under commissioning phase at present.

 Phase 2 is certain to proceed ahead with Shareholder’s Agreement signed with Vopak Terminal Pengerang (VOPAK) for the development and construction of storage facilities for the RAPID complex. It is expected to add another 2.1m cbm of storage capacity targeted to reach completion by 2019. This is also expected to contribute positively to the group’s EPCC division with Dialog’s portion amounting to RM5.5b.

 DIALOG has entered into a JV (with 25% equity stake) in the upcoming Pengerang Regasification project. Earnings are expected by 2018 (completion by 4Q17).

 Overall, we believe that the group is on track to build on its long-term recurring income stream generating asset base with multiple tank terminals put in place to capitalize on the potential growth in Malaysia’s downstream sector in RAPID. Change to

Forecasts  We maintain our forecasts for now as we deem the results to be within expectations.

Rating Downgraded to MARKET PERFORM from OUTPERFORM due to the recent sharp rebound in share prices.

Valuation  SoP valuation maintained at RM1.67.

 Whilst we still like the stock for its growing tank terminal portfolio which provides recurring income, we believe the nearterm positives have been priced in by the market. It is trading at 30.3x FY15 PER, at +0.5 std deviation from its 8-year mean PER.

Risks to Our Call  i) Delay in its in-house EPCC jobs and projects.

 (ii) New capex intensive projects which drain cash flows. 

Source: Kenanga