DIALOG had another record breaking quarter with core earnings breaching the RM100m mark backed by stronger EPCC earnings. Following that, we upgrade our FY18-19E earnings by 3%. We are keeping our MARKET PERFORM call on the stock with higher TP of RM2.05/share but note that its Phase 1 independent expansion plan of another 1m m³ capacity would inject an additional RM0.12/share to our SoP valuation.

Above our expectations. DIALOG registered core net profit (CNP) of RM348.2m in FY17, accounting for 106%/104% of our/consensus fullyear estimates. This came within consensus expectations but above our expectation due to stronger-than-expected contribution from the EPCC segment. A final dividend of 1.45 sen/share is proposed, bringing its full-year DPS to 2.65 sen (vs 2.2 sen in FY16), which also beat our expectation of 2.4 sen.

FY17 core earnings jumped 22%. DIALOG’s core earnings went up by 10% QoQ to RM103.5m in 4Q17 in tandem with a 6% increase in revenue, thanks to stronger EPCC segment with its on-going projects. YoY-wise, CNP also jumped by 42% from RM72.8m in tandem with 35% stronger top-line boosted by: (i) higher work orders from EPCC and fabrication segment, (ii) specialist products & services, and (iii) plant maintenance & catalyst handling services. Cumulatively, CNP also rose by 22% on the above-mentioned reasons coupled with better contribution from JV and associates. Note that its JV and associate contribution improved by 51% YoY to RM107.0m in FY17 as a result of improvement in better utilisation of tankers and rental rates.

Phase 3 in the making. With the successful delivery of Phase 1 and good progress for Phase 2, DIALOG is already in the midst of securing new potential partners for Phase 3 to build more petroleum and petrochemical storage terminals. With the remaining unutilised 200-300 acres of land, DIALOG could construct storage terminals of up to 5m m³ within the next 5 to 10 years in different phases. It would be a mixture of dedicated and independent storage terminals and the percentage of equity stake is yet to be firmed up at this juncture. We also do not discount the possibility of DIALOG building and owning 100% of a portion of the additional capacity if its financials are in a comfortable position.

Upgrade FY18-19E earnings by 3% after we factored in: (i) higher revenue from both fabrication segment and stronger specialist products and services division.

Keep MARKET PERFORM. Post earnings upgrade, we are keeping MARKET PERFORM on the stock with higher SoP-driven TP of RM2.05/share from RM1.94 previously (implying 28.8x FY19E PER and 3.4x P/BV coupled with stronger balance sheet (turning into net cash position as of 4Q17). Note that potential rerating catalysts in the near term are: (i) the Phase 1 independent terminal expansion for additional 1m m³ capacity which would give additional RM0.12/share to our SoP valuation, and (ii) materialisation of Pengerang Phase 3. 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 Aug 2017