Period

3Q15/9M15

Actual vs. Expectations

Core 3Q15 net profit came in at RM81.8m, bringing its cumulative 9M15 core net profit to RM211.5m. This is above our, and consensus, forecast, at 85.0% and 86.4%, respectively. Higher-than-expected earnings contribution from its production enhancement operations in Production Sharing Contract (PSC) for three fields namely, D35, D21 and J4 were the contributory factor for the outperformance.

Dividends

1.0 sen DPS was announced in the quarter, which accounted for 43.5% of our full-year DPS forecast of 2.3 sen.

Key Results Highlights

In 3Q15, core net profit surged by 65.2% YoY to RM81.8m from RM49.6m primarily due to the contribution from its PSC (D35, D21 & J4) which has started contributing to the group since September 2014. This is however, being slightly offset by lower specialist products and services sales, probably due to weaker oil prices.

Core net profit remained largely flat QoQ in 3Q15 with a slight increase of 2.6% registered due to higher revenue QoQ possibly driven by seasonally higher EPCC division revenue driven by higher level of work done.

For 9M15, core net profit posted strong growth of 29.3% YoY to RM211.5m from RM163.6m underpinned by: (i) higher PSC contribution (D35, D21 & J4), which resulted in better YoY EBIT margins for the group (9M15: 13.9% vs. 9M14: 8.1%), and (ii) higher EPCC activities as the group completed the construction of Pengerang Terminal Phase 1C and began works on the Phase 2 development.

Outlook

Pengerang Terminal Phase 1 has already commenced operations in 3Q15 post completion of construction of Phase 1C. Currently, some EPCC works are already on-going for Phase 2.

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 (RGT). Earnings are expected by 2018 (completion by 4Q17). Financing proposals of project financing for both the Phase 2 and RGT were announced recently, signalling the group’s commitment of their long-term expansion plans.

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 revised our FY15 and FY16 CNP forecasts by 19.4% and 20.8%, respectively, after including higher PSC contribution (FY15: RM60.0m, FY16: RM80.0m) from RM10.0m for both years. We also introduced our FY17E earnings based on: (i) RM1.6b EPCC revenue assumption, (ii) 10.0% growth in specialist products & catalyst handling business as market is expected to recover, and (iii) higher JV earnings driven by higher Pengerang Terminal Phase 1 capacity utilisation (75.0%).

Rating

Maintain MARKET PERFORM

Valuation

SoP valuation revised to RM1.70 from RM1.67 previously post earnings revision and omission of DCF valuation of Balai marginal field project as the project will not proceed ahead due to low crude oil prices. We have also rolled forward or SoP valuation to CY16.

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 Research - 13 May 2015