1Q18 results are deemed within expectations, as 1Q is seasonally the weakest quarter. While DIALOG is on track to build on its Pengerang Phase 2, we continue to favour the stock for its growing recurring income from its tank terminal business following its acquisition of 45% stake in CTSB (Langsat 1&2) and expansion plan with Langsat 3. Reiterate our OP call with an unchanged TP of RM2.55/share with Pengerang Phase 3 being the major catalyst.

Within expectations. DIALOG recorded core net profit of RM89.8m in 1Q18 accounting for 23%/22% of our/consensus’ full-year estimates after stripping off RM5.6m gain on disposal of PPE and RM65.6m fair value gain on disposal of JV. It is deemed within expectations as the first quarter is seasonally weaker than the other quarters. No dividend was declared as expected.

Seasonally weaker 1Q. In tandem with a 20% decrease in revenue, the CNP fell 13% QoQ due to seasonality, which was further dragged by 7% higher finance cost, 4% weaker associate income and 5% higher tax expense. YoY, CNP improved by 41% from RM63.6m in 1Q17 to RM89.8m in 1Q18 in tandem with 19% stronger top-line thanks to: (i) stronger specialist products and technical services in Indonesia, Thailand and India, (ii) higher plant maintenance services and E&C contribution from Malaysian operations as well as 8% stronger JV and associate contribution led by its Pengerang independent terminal.

Pengerang Phase 3 is the catalyst. 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 should its financial position is conducive.

Keep OUTPERFORM. With no changes in our earnings estimates, we are keeping our OUTPERFORM call on the stock with unchanged SoPdriven TP of RM2.55 (implying 35.1x FY19E PER and 4.2x P/BV). We continue to favour the stock for its growing recurring income from its tank terminal business following the acquisition of 45% stake in CTSB (Langsat 1&2) from MISC and expansion with Langsat 3. We believe formalisation of Phase 3 will be the major re-rating catalyst to DIALOG in the long run. Downside risk to our call is a delay in its in-house EPCC jobs, which will postpone future recurring income from Pengerang Terminal Phase 1 expansion and Phase 3.

Source: Kenanga Research - 22 Nov 2017