Period

1Q16

Actual vs. Expectations

1Q16 core net profit of RM60.1m came in below expectations, making up 18%/20% of house/street’s full-year estimates.

The variation was mainly due to lower sales of specialist products and services.

Dividends

No dividend was declared as expected.

Key Results Highlights

1Q16 core profit leapt 20.0% QoQ from RM50.1m despite a 7.1% drop in revenue, mainly bolstered by stronger contribution from JV of RM12.1m from a loss of RM1.3m in 4Q15. The JV managed to return to the black thanks to higher contribution from Phase 1 of the Pengerang Deepwater Terminal arising from cost normalisation and better utilisation. Meanwhile, the stronger contribution was also supported by a surge in others operating income of RM18.0m from RM0.8m where we believe is attributable to forex gain on stronger USD. However, this was partially offset by the margin deterioration to 10.9% from 19.2% previously due to lower contribution from engineering and construction activities for Pengerang.

YoY, core net profit jumped 20.4% from RM49.9m in 1Q15 largely attributable to higher engineering and construction segment income from multiple projects such as the on-track Phase 2 of Pengerang Deepwater Terminal, MLNG 9 and SAMUR piping works but was partially dragged by its slower local specialist products and services division.

Outlook

Pengerang Terminal Phase 1 which has a storage capacity of 1.3m cbm is already in full operation and fully leased out. To date, there are more than 300 vessels, including supertankers that are using the terminal for loading and unloading purposes.

Currently, its engineering and construction segment is busy with the Phase 2 project and the progress is still as per schedule. 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) with a total investment of RM2.7b. Earnings are expected by 2018 as the RGT will be completed by 4Q17. Financing proposals of project financing for both the Phase 2 and RGT were announced in August, signalling the group’s commitment on their long-term expansion plans.

Meanwhile, its specialist products & services segment is expected to remain weak in the medium-term amid a slowdown in the O&G sector. Overall, we believe that the group is on track to build on its long-term recurring income 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 FY16 and FY17 forecasts downwards by 12% and 10%, respectively, after factoring in: (i) - 10% growth assumptions in FY16 from -5% previously for its specialist products & services, and (ii) 0% growth assumption for FY16/17 from 10% previously for catalyst maintenance services.

Rating

Maintain MARKET PERFORM

Valuation

Although we forecasted lower earnings, our SoP valuation is now revised to RM1.71 from RM1.65 as we had previously over-estimated the net debt position. However, the new target price still warrants us to maintain our MARKET PERFORM recommendation.

Risks

(i) Delay in its in-house EPCC jobs and projects.

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

Source: Kenanga Research - 18 Nov 2015