DIALOG’s FY16 results beat our expectation, which was boosted by a higher forex gain but the results were in line with consensus. We still believe its long-term recurring income business model remains firm but near-term growth prospect could be dragged by weaker upstream activities and margin erosion. Thus, we reiterate our MARKET PERFORM with target price revised to RM1.51/SoP share after a mild earnings forecast cut.

Above expectation due to realised forex gain. FY16 results beat our expectation with core net profit (CNP) of RM286.4m (+10% YoY) coming 9% above our estimate, but it was on the dot of consensus estimate. The positive deviation was largely caused by a forex gain of RM26.8m. A final dividend of 1.2 sen, similar to last year, was declared, bringing the full-year dividend per share to 2.2 sen, slightly higher than our initial forecast of 2.1 sen.

Margin erosion. CNP of RM72.8m in 4Q16 fell 7.2% QoQ despite revenue increasing 11.8% and stronger contribution from JV and associates. This is largely due to continued margin erosion, evident by a significant drop of EBITDA margin to 9.3% in 4Q16 from 13.6% in the preceding quarter. YoY wise, CNP slid slightly by 0.9% from RM73.5m in 4Q15, dragged by weaker EBITDA margins (9.3% in 4Q16 vs. 17.3% in 4Q16) but was cushioned by stronger JV and associate contribution led by its Pengerang independent terminal. Cumulatively, FY16 CNP rose 9.5% from RM261.6m a year ago, in line with higher revenue base due to higher volume of fabrication works in both midstream and downstream segments (+7.4% YoY) as well as better JV and associate income as a result of maiden contribution from its Pengerang independent terminal.

Long-term growth model stays 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, DIALOG 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 still sluggish. We have trimmed our FY17/FY18 estimates by 3.8%/4.1% by lowering product specialist sales and contribution from upstream segment in view of the challenging environment.

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 SoP-driven TP is adjusted lower to RM1.51 (from RM1.62 previously) post earnings adjustment and accounting dilution impact from remaining unconverted warrants, implying 27.6x FY17 PER and 3.3x P/BV.

Downside risk to our call is a delay in its in-house EPCC jobs, which will further delay its future recurring income from Pengerang Terminal Phase 2.

Source: Kenanga Research - 19 Aug 2016