FY18 results recorded a healthy 23% earnings growth, driven by full consolidation of Langsat Terminals’ accounts, coupled with the commencement of Pengerang LNG2. Our FY19-20E earnings, which implies growth of 7-14%, is driven by upcoming expansions in Pengerang Phase 1E and 2, while Phase 3 remains a promising longer-term prospect. Reiterate OUTPERFORM at TP of RM3.80, with continued earnings growth delivery as a further share price catalyst.

Within expectations. FY18 core net profit of RM428.4m (arrived after stripping-off gains on disposal of JV and PPE, totalling to RM82.6m) came in within expectations on the dot of our forecast and 95% of market consensus. Proposed final dividend per share of 1.8 sen was also in-line with expectations, bringing FY18 dividends to 3.2 sen per share (versus FY17 of 2.65 sen per share).

Positive yearly earnings. Overall, FY18 core earnings came in 23% higher YoY, helped by: (i) consolidation of Langsat Terminals’ accounts, which are all now 100%-owned after the completion of acquisitions in Sep 2017 and June 2018 (as compared to the start of FY18, where DIALOG had an effective stake of 44% in Langsat Terminals 1 and 2, and 55% in Langsat Terminal 3), and (ii) earnings contribution from Pengerang LNG2 (25% stake), having commenced commercial operations in Nov 2017, which boosted its JV and associates’ income by 21% YoY.

For the individual quarter of 4Q18, core earnings stayed relatively flat at 1% growth YoY. While earnings were lifted by the aforementioned reasons, the results were dragged by lower revenue (-37% YoY), which we believe was due to lower EPCC works as Pengerang Phase 2 comes to its tail-end. Sequentially, core earnings dropped 12% QoQ, due to the lower revenue (-30% QoQ) on similar reasons.

Still in expansion mode. Post-results, we maintained our FY19E numbers, while introducing FY20E earnings forecast of RM522m. Our current forecasts imply earnings growth of 7-14% for FY19-20E, driven by (i) Pengerang Dedicated Terminals Phase 2, with expected commencement in 1H 2019, adding an approximate storage capacity of 2.1 mil cubic metres, and (ii) Pengerang Phase 1E, which is expected to commence in 2H 2019, adding an approximate storage capacity of 430k cubic metres, coupled with (iii) full-year earnings from Langsat Terminals’ consolidated accounts and Pengerang LNG2. Post- commencement of Pengerang Phase 1E and 2, the group’s effective storage capacity (measured by the DIALOG’s effective equity stake) would jump by an additional c.48%. As for the longer-term, DIALOG is currently in the midst of securing partners for Pengerang Phase 3, with the land reclamation of 300 acres believed to be currently at works. With an initial capex of RM2.5b and expected commencement in 5-6 years’ time, we believe Pengerang Phase 3 will eventually add an additional c.5-6m cubic meters of storage capacity.

Reiterate OUTPERFORM, with an unchanged SoP-derived TP of RM3.80. While the share had enjoyed a tremendous rally since early last year, and has now been included as an FBMKLCI composite stock, we believe further share price catalyst could still come from (i) further earnings growth crystallisation from its recurring tank terminal business, and (ii) further concrete developments in Pengerang Phase 3 to drive longer-term growth.

Risk to our call includes (i) unexpectedly lower utilisations in its tank terminals, (ii) delay in EPCC jobs, which could further delay income contributions from upcoming expansions, i.e. Pengerang Phase 1E, 2 and 3, and (iii) any delays in the development of Pengerang Phase 3.

Source: Kenanga Research - 17 Aug 2018