DIALOG’s 9M16 results fell short of expectations, dragged by slower upstream activities and weaker specialist products and services sales. However, we believe its long-term recurring income business model is slowly in shape with multiple tank terminals putting in place evident by the steady contribution from its associate and JVs. Thus, we reiterate our MARKET PERFORM with a new target price of RM1.62/SoP share.

9M16 below. DIALOG reported 9M16 results, which came below expectations with core net profit (CNP) of RM194.4m (+3% YoY) making up only 65% of our full-year FY16 estimates and 67% of market consensus. This excluded RM19m forex gain and RM3.5m gain on disposal of subsidiary and PPE. The 3% YoY growth is driven by close to five times jump in JV and associate earnings (led by increased contribution from Pengerang Independent Terminal since 1Q16) but was partially offset by weakness from upstream related divisions. An interim dividend of 1.0 sen, similar to last year, was declared as expected.

Margin erosion. CNP of RM69.7m in 3Q16 fell 8.8% QoQ despite revenue only inching up by 0.3%. Engineering, construction and fabrication division remained busy with on-going local projects such as Pengerang Deepwater Terminal Phase 2, Jetty Topside works for Samsung, MLNG Train 9, Toyo bullet tanks and SAMUR piping works as well as international projects in New Zealand and Singapore. However, margin compression is evident with a drop in EBITDA margin to 11.4% in 3Q16 from 13.4% in the previous quarter. Similarly, CNP also dropped 14.9% YoY, no thanks to slower upstream activities and weaker specialist products and services sales but partially offset by increased JV and associate earnings.

Recurring business model intact. Its Phase 1 independent terminal with a storage capacity of 1.3m m³ has been fully leased out to international oil majors and traders. There is a vacant land in which DIALOG is considering to expand with a projection of additional capacity of 1m m³. In addition, its engineering and construction segment is busy with the Phase 2 project and the progress is still as per schedule. It is expected to add another 2.1m m³ 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. Meanwhile, DAILOG has also entered into a JV with a 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 4QCY17.

Upstream segment remains weak. We have trimmed our FY16/FY17 estimates by 11%/8% by lowering product specialist sales and contribution from upstream segment in view of challenging environment. FY18E earning of RM343.3m is introduced assuming: (i) 10% growth in catalyst handling services and plant maintenance division, (ii) 5% growth in specialist product services, and (iii) 90% utilisation in Pengerang Phase 1 Terminal.

Maintain MARKET PERFORM. Overall, we believe 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. Our TP is adjusted lower to RM1.62 (from RM1.65 previously) as we rolled over our valuation base-year to CY17, implying 25.7x FY17 PER and 3.5x P/BV. Downside risks to our call are (i) delay in its in-house EPCC jobs, which will further delay its future recurring income from Pengerang Terminal Phase 2. 

Source: Kenanga Research - 19 May 2016