The strong 1H19 results matched expectations as core earnings grew 23% YoY, led by higher tanker contributions and cost savings from EPCC of Pengerang Phase 2. Moving forward, our FY19-20E earnings, which imply growth of 7- 14%, are driven by upcoming expansions in Pengerang Phase 1E and 2, while Phase 3 remains a promising longer- term prospect. Maintain OUTPERFORM at TP of RM3.80 with continued earnings growth delivery as a price catalyst.

Within expectations. 1H19 core net profit of RM251.2m came in within expectations at 55%/54% of our/consensus full-year forecasts. No dividends were announced, as expected.

Overall positive results. 1H19 core earnings jumped 23% YoY on the back of: (i) full consolidation of Langsat Terminals, as compared to end- 1H18 where DIALOG owned an effective stake of 80% in Langsat Terminals 1 and 2, (ii) commencement of operations in Pengerang LNG 2 (25% stake) in Nov 2017, and (iii) cost savings as the EPCC for Pengerang Terminals Phase 2 reached its tail-end phase.

For the individual quarter of 2Q19, core earnings of RM136.7m improved 19% YoY, similarly due to: (i) consolidation of Langsat Terminals 1 and 2, and (ii) cost savings from EPCC of Pengerang Terminals Phase 2. Sequentially, core earnings leapt 19% QoQ, similarly due to cost savings realised from the EPCC of Pengerang Phase 2.

Looking towards Pengerang Phase 3. Post-results, we made no changes to our FY19-20E forecasts which imply earnings growth of 7- 14%, driven by: (i) Pengerang Dedicated Terminals Phase 2, with expected commencement in 2Q CY2019, adding an approximate storage capacity of 1.3m cubic metres – lowered from initially expected 2.1m cubic meters as Petronas shifts its requirement more towards Petrochemicals (from crude oil), thus requiring lower storage capacity, but should be earnings neutral as payments are based made on an IRR-basis (i.e. rates are fixed), and (ii) Pengerang Phase 1E, which is expected to commence in mid-2019, adding an approximate storage capacity of 430k cubic metres, coupled with (iii) full-year earnings from Langsat Terminals’ consolidated accounts and Pengerang LNG2. As for the longer-term, DIALOG is currently in the midst of securing partners for Pengerang Phase 3, with the land reclamation expected to be completed by the year end. With an initial capex of RM2.5b and expected commencement in 3-4 years’ time, we believe Pengerang Phase 3 will eventually add an additional c.5-6m cubic meters of storage capacity.

Maintain OUTPERFORM, with an unchanged SoP-derived TP of RM3.80, implying PER of 48x/41x on FY19E/FY20E at roughly +2S.D. from its mean. We believe share price catalysts could still come from: (i) further earnings growth delivery from its recurring tank terminal business and downstream services, and (ii) further concrete developments in Pengerang Phase 3 to drive longer-term growth.

Risks to our call include: (i) lower utilisations in its tank terminals, (ii) delay in EPCC jobs, which could further delay income contributions from upcoming expansions, and (iii) delay in the development of Pengerang Phase 3.

Source: Kenanga Research - 15 Feb 2019