DIALOG recorded its best ever results in 3Q17 led by stronger revenue and higher JV and associate income. Following that, we upgrade our FY17-18E earnings by 13%- 16% in anticipation of stronger fabrication income as well as higher tanker rates. As share price has surged 23% YTD, we are keeping our MARKET PERFORM call on the stock with higher TP of RM1.94/share but materialisation of Pengerang subsequent phases and phase 1 expansion are potential re-rating catalysts.

Above our expectations. DIALOG recorded core net profit (CNP) of RM246.0m in 9M17 accounting for 84%/78% of our/consensus fullyear estimates. This came within consensus’ expectations but above our expectations due to stronger than expected contribution from specialist products and services, fabrication segment as well as JV and associate income. An interim dividend of 1.2 sen, higher than 1.0 sen in 3Q16, was declared, which is also better than expected.

Stronger both QoQ and YoY. DIALOG booked in CNP of RM95.6m in 3Q17 after excluding the gain on disposal of PPE and PPE write off. In tandem with a 7% increase in revenue, CNP surged 10% QoQ which we believe is largely due to stronger fabrication segment underpinned by higher activities from RAPID. YoY-wise, CNP also improved by 22% from RM78.4m in tandem with 42% stronger top-line and underpinned by stronger JV and associate contribution led by its Pengerang independent terminal. Cumulatively, CNP also rose by 15% on the above-mentioned reasons. Note that its JV and associate contribution jumped 87% YoY to RM78.7m in 9M17 as a result of improvement in better utilisation of tankers and rental rates.

Steady long term growth model. While the 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 Phase 2 project with another 2.1m m³ of storage capacity, targeted to reach completion by 2019 is still on track. 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.

Upgrade FY17-18E earnings by 13%-16% after we factor in (i) higher revenue from both fabrication segment and higher specialist products and services division and (ii) stronger JV and associate income assuming better tanker utilisation and stronger rates. Meanwhile, FY19E earnings of RM387.4m is introduced, implying a 1.9% growth YoY despite a 7% drop in revenue assuming lower contribution from fabrication segment but was cushioned by stronger JV and associate income led by Pengerang phase 2 and RGT projects.

Keep MARKET PERFORM. Post earnings upgrade and rolling over of the valuation base year to CY18, we upgrade our SoP-driven TP to RM1.94/share (implying 27.2x FY19E PER and 3.6x P/BV) from RM1.51/share previously. As DIALOG’s share price has surged 23% YTD, we are keeping MARKET PERFORM call on the stock. Potential re-rating catalysts are materialisation of subsequent phases for Pengerang with new potential partners and expansion of existing phase 1 capacity. 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 - 17 May 2017