Within expectations. At 51%/50% of our/consensus estimates, 6M18 core net profit (CNP) of RM205.1m (+36% YoY) came within expectations. No dividend was declared as expected.

Earnings up both QoQ and YoY. Post its seasonally weaker 1Q18, 2Q18 CNP of RM115.4m came in 29% QoQ stronger thanks to: (i) stronger integrated technical services (i.e. EPCC, specialist products & services, plant maintenance and catalyst handling services) as evident by 10% growth in top-line and improved JV & associates contribution (+44%; led by commercialisation of the LNG regasification facilities and higher contribution from upstream business). YoY, CNP improved by 27% despite flattish top-line largely attributable to: (i) stronger EBITDA margins to 14.7% from 11.3%, resulting from higher proportion of high margined works such as maintenance services and tank terminal services, and (ii) better JV & associates contribution (+55%). Cumulatively, 6M18 earnings also increased by 36% helped by: (i) 8% stronger top-line, (ii) improved EBITDA margins, by 2.7 ppts to 13.7%, and (iii) 32% higher JV & associates contribution.

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 has 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.

Keep OUTPERFORM. Despite no changes in our FY18-19E earnings, we imputed additional 3m³ (remaining 60%) of Phase 3 into our SoP valuation (worth RM0.31/share) and ascribe higher PER of 17x (from 16x) for its core integrated services including product specialist, plant maintenance and fabrication services. This lifted our SoP-driven TP to RM2.95 (implied FY19E PER of 40x and 4.6x PBV). Note that we have yet to account for the 500-acre buffer industrial land surrounding Pengerang Phase 1-3. We continue to favour the stock for its increasing recurring income from its tank terminal business following its acquisition of 45% stake in CTSB (Langsat 1&2) from MISC and expansion with Langsat 3. Still an OUTPERFORM call with formalisation of Phase 3 being the major re-rating catalyst to DIALOG.

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 - 15 Feb 2018