Strong 9M19 earnings beat expectations, driven by higher contributions from its tanker storage business coupled with cost savings from tail-end stages of EPCC projects. The group also announced that it had started construction works on Pengerang Phase 3, and had signed its first longterm storage agreement with BP Singapore. Overall, Phase 3 is expected to be completed in mid-2021. Maintain OUTPERFORM with TP of RM3.80.

Above expectations. DIALOG registered 9M19 core net profit of RM395.1m, coming in above expectations at 87% and 84% of our and consensus full-year forecasts, respectively, lifted by margins expansion due to cost savings from the tail-end phase of the EPCC for Pengerang Terminals Phase 2. Dividend of 1.5 sen per share was also announced (versus last year’s 1.4 sen per share) – within expectations.

Overall positive results. 9M19 earnings jumped 22% YoY, mainly driven by: (i) stronger associates’ contributions following the commencement of Pengerang LNG 2 (25% stake) in Nov-2017, coupled with initial stages of commercial operations in Pengerang Phase 2A since Nov-2018, (ii) full consolidation of Langsat Terminals 1 and 2, and (iii) cost savings from tail-end stages of the EPCC for Pengerang Phase 2, resulting in higher margins. For the quarter of 3Q19, net profit of RM143.7m similarly leapt 21% YoY, due to 80% jump in associates’ contributions, likely on the back of initial commercial operations in Pengerang Phase 2A, on top of costs savings from tail-end stages of EPCC for Pengerang Phase 2. Meanwhile, sequentially, 3Q19 net profit grew 5% QoQ, driven by: (i) increase in EPCC works as reflected in the higher revenue (+4%), likely from early works in Pengerang Phase 3, coupled with (ii) higher associates’ contribution (+40%) from initial commercial operations in Pengerang Phase 2A.

Started works on Pengerang Phase 3. Separately, the company announced that it had started construction works for the terminal and jetty for Phase 3 of the Pengerang Deepwater Terminals. With an initial investment cost of RM2.5b, the completion is expected in mid-2021, with land reclamation currently at 62% and scheduled for completion at end-2019. Additionally, the company has also signed a long-term storage agreement with BP Singapore for storage tanks capacity of 430k m3 for clean petroleum products in Pengerang Phase 3, with DIALOG holding a 90% stake (remaining 10% held by Johor state). This represents the first instance of a public development of an operating partnership and clientele-securement that we have seen for Pengerang Phase 3, and we expect further arrangements to follow, as construction progresses further. Overall, we believe Pengerang Phase 3 should eventually add approximately c.5-6m cubic meters of gross storage capacity.

Maintain OUTPERFORM, with an unchanged SoP-derived TP of RM3.80. We believe further share price catalyst 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. Postresults, we raised our FY19-20E CNP by 3.0-2.6%.

Risks to our call include: (i) lower utilisations of 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 May 2019