The 9M17 results beat our estimate as the stronger-than- expected contributions from JV/associate incomes led to record-quarterly earnings in 3Q18. In light of this, we upgrade FY18-19E earnings by 8-10%. Reiterate OP with higher SoP-derived TP of RM3.70 with key catalyst being FBMKLCI inclusion, concrete developments at Pengerang Phase 3 and further crystallization of earnings growth.

Within consensus estimate but above ours. 9M18 CNP of RM323.5m is within consensus estimate (76%) but above ours, accounting for 82% of our full-year forecast. The positive deviation stemmed from higher-than-expected associate/JV contributions which we opine was from 25%-owned Pengerang LNG (Two) S/B which recently commenced commercial operations of the Regasification Terminal (RGT) in Nov-2017. An interim NDPS of 1.4 sen was declared, which is on track to our FY18 NDPS assumption of 2.8 sen.

Record quarterly earnings. 3Q18 record CNP of RM118.4m, which rose 3% QoQ, was backed by top-line growth of 1% and stronger EBITDA margins by 1.4ppt, due to: (i) higher recognition of stronger margin downstream contracts, i.e., EPCC, specialist products & services, plant maintenance and catalyst handling services, and (ii) better upstream E&P contributions from the higher oil price environment. YoY, CNP improved by 26% despite weaker top-line growth of 5%, largely attributable to: (i) stronger EBITDA margins to 16% from 10% on higher proportion of high margin works such as maintenance and tank terminal services, and (ii) better JV & associates contribution (+11%) from the commencement of the regasification terminal in Nov-2017. YTD, 9M18 earnings leapt 32% thanks to: (i) 3% stronger top-line, (ii) improved EBITDA margins by 3.7 ppt to 15%, and (iii) 24% higher JV & associates contribution as explained above.

Still on expansion mode; earnings upgraded. Construction progress for Pengerang Deepwater Terminal Phase 2 is intact with targeted completion in early FY19 and DIALOG is currently in the midst of securing new potential partners for Pengerang Phase 3 (300 acres) to build more petroleum and petrochemical storage terminals. Recall that DIALOG entered into a MoU with Johor State to further develop Pengerang Phase 3 last month with an initial investment amount of c.RM2.5b. Land reclamation contract for Pengerang Phase 3 has been awarded and we believe the entire 300 acres land could add storage terminals of 5m-6m m³ in phases with the initial capex (of RM2.5b) adding c.2m m³ capacity. Post 3Q18, we upgrade FY18-19E earnings by 8-10% after increasing contributions from DIALOG’s associates/JV from higher utilisation and rates at 25%-owned Pengerang LNG (Two) S/B’s regasification terminal (RGT).

Reiterate OUTPERFORM with higher SoP-derived TP of RM3.70 from RM3.35 after accounting for: (i) higher contributions from Pengerang Phase 2 RGT into our SoP valuation, and (ii) ascribing higher PER of 18x from 17x for its core integrated services premised on the better business prospects. We believe positive share price catalysts could come from: (i) FBMKLCI inclusion where the component list is due for review in June-2018, (ii) further earnings growth crystallization from recurring tank terminal business, and (iii) further concrete developments at Pengerang Phase 3. 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 - 17 May 2018