Period

4Q15/FY15

Actual vs. Expectations

Core 4Q15 net profit came in at RM50.1m, bringing its cumulative FY15 core net profit to RM281.6m, which is broadly within our expectation at 95% but above consensus by 11%. Our core net profit excludes: (i) RM23.4m disposal gain of other investment, and (ii) impairment loss on goodwill and other investment of RM9.8m.

Dividends

Final single tier DPS of 1.2 sen was declared for the quarter, bringing fullyear DPS to a total of 2.2 sen (95.7% of our forecast).

Key Results Highlights

In 4Q15, core net profit declined slightly by 4.1% YoY to RM50.1m from RM52.2m in the corresponding quarter last year driven by lower revenue of plant engineering and maintenance in Singapore, New Zealand and Australia, and slower sales of specialist products and services amid a slowdown in the O&G industry. Meanwhile, higher contribution from engineering and construction activities for Pengerang and upstream business activities helped to partially offset the negative impact, improving its EBIT margin to 19.2% from 9.4%.

4Q15 core net profit was 38.8% weaker QoQ due to: (i) lower overall sales revenue across all its business division potentially caused by lower O&G activities and seasonality, and (ii) loss of RM1.3m from its associate and jointly-controlled entities as initial start-up costs of the Pengerang Independent Terminals started to kick in during the quarter.

For FY15, the group posted encouraging growth of 38.8% in its core net profit YoY to RM281.6m from RM202.9m in the previous financial year. This is a reflection of: (i) higher contribution from higher margin engineering and construction work of Pengerang Tank Terminal and (ii) stronger upstream production enhancement services segment. This more than offset the negative impact from weaker specialist products & services performance and lower associate’s earnings contribution post inclusion of start-up costs of its tank terminal in Pengerang.

Outlook

Pengerang Terminal Phase 1 has already commenced operations in 3Q15 following the 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.

Meanwhile, its specialist products & services segment is expected to remain weak in the medium-term amid a slowdown in activities of the O&G sector.

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 adjusted our FY16 and FY17 CNP forecasts downwards by 12% and 10%, respectively, after factoring in: (i) -5% and 0% growth assumption (from 10% growth for both years previously) for its specialist products & services in FY16/17 and (ii) lower utilisation of 45% and 70% for Pengerang Phase 1 tank terminal in FY16 and FY17 respectively (from 90% for both years) to factor in a more gradual uptick in terminal utilisation.

Rating

Maintain MARKET PERFORM

Valuation

SoP valuation revised to RM1.65 (from RM1.70 previously) post changes in our assumptions.

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 - 21 Aug 2015