Within expectations. DIALOG recorded core net profit (CNP) of RM150.3m in 1H17 accounting for 52%/49% of our/consensus full- year estimates after stripping off gain on disposal of PPE amounting to RM22.3m. No dividend was declared as expected.

Stronger both QoQ and YoY. DIALOG booked in CNP of RM86.8m in 2Q17 after excluding the gain on disposal of PPE and other investment amounting to RM4.6m. In tandem with a 31% increase in revenue, CNP surged 37% QoQ largely due to pick-up in activities post a seasonally weak 1Q17. YoY-wise, CNP also improved by 13% from RM77.1m in 2Q16 in tandem with 37% stronger top-line and underpinned by stronger JV and associate contribution led by its Pengerang independent terminal. However, it was partially offset by weaker EBITDA margins (11.3% in 2Q17 vs. 15.7% in 2Q16) resulting from weaker upstream activities, including specialist products and services and increase in proportion of lower-margined jobs. Cumulatively, CNP also surged by 11% on the above-mentioned reasons. Note that its JV and associate contribution jumped 85% YoY to RM50.1m in 1H17 as a result of improvement in better tankers utilisation and rental rates.

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 with progress as per scheduled. 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.

Fabrication segment backed by RAPID. We do not expect a substantial recovery in upstream segment, but we believe the downside risk could be limited from current level. On the other hand, we believe its fabrication segment to remain occupied backed up existing projects in hand while benefiting from the on-going RAPID project. No changes to our earnings forecast.

Keep MARKET PERFORM. Overall, while DIALOG is on track to build on its Pengerang Phase 2, the company is currently seeking for new potential partners for its subsequent phases. We maintain our MARKET PERFORM call with unchanged SoP-driven TP of RM1.51, implying 27.6x FY17E 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 - 15 Feb 2017