Strong FY19 results beat expectations, driven by higher contributions from its tanker storage business and EPCC projects. Moving forward, land reclamation works for Pengerang Phase 3 is on track for completion by end-CY19. With EPCC works expected to follow thereafter, we target commencement to be around mid-CY21. Pengerang Phase 3 will be the key growth driver for the group moving forward. Maintain OUTPERFORM with upgraded SoP-TP of RM4.15.

FY19 results above expectations. DIALOG registered FY19 net profit of RM535.8m, beating expectations, coming in above our forecast by 13%, and consensus by 6%, mainly attributable to stronger-thanexpected contributions from EPCC, possibly driven by costs recovery from the tail-end phases of EPCC for Pengerang Terminals Phase 2. Likewise, proposed dividend of 2.3 sen per share (bringing full year to 3.8 sen) is also above expectations.

Strong FY19 results. FY19 core net profit jumped 25% YoY, driven by: (i) stronger associates’ contributions following the commencement of Pengerang LNG 2 (25% stake) in Nov 2017, and Pengerang Phase 2A (25% stake) since Nov 2018, (ii) full-year consolidation of Langsat Terminals 1 and 2, and (iii) cost recovery from tail-end stages of the EPCC for Pengerang Phase 2, resulting in higher margins. For 4Q19, net profit of RM140.7m leapt strongly by 34% YoY, similarly driven by: (i) greater contribution from associates, on the back of Pengerang Phase 2A’s commencement, and (ii) cost recovery from tailend stages of EPCC for Pengerang Phase 2. Sequentially, however, 4Q19 net profit was marginally down by 2% QoQ, due to lower EPCC activities during the quarter, as reflected by the lower revenue.

Pengerang Phase 3 driving long-term growth. Land reclamation works for Pengerang Phase 3 is currently on track for completion by end-CY2019, with EPCC works expected to commence thereafter. That said, we expect the first phase of Pengerang Phase 3 to be ready by mid-CY2021. To recap, Pengerang Phase 3 has already managed to secure its first client in BP Singapore back in May 2019 via a long-term storage agreement with a capacity of 430k m3. This was the first instance of a clientele-securement for Phase 3, and hence, we are expecting further announcement of similar nature to be made in due course. Overall, we believe Pengerang Phase 3 could eventually add up to approximately 5-6m cubic meters of gross storage capacity, although the first phase for commencement could start off with ~3m cubic meters. We expect Pengerang Phase 3 to be the group’s main growth driver in the coming years.

Maintain OUTPERFORM. Post-results, we raised our FY20E earnings forecast by ~5% from higher EPCC assumption, while simultaneously introducing our FY21E numbers. Likewise, our SoP-derived TP is also raised to RM4.15 (from RM3.80 previously) – implying 42x forward PER, which is close to +2SD from its 5-year mean valuations. Nonetheless, we continue to like DIALOG for: (i) solid track record of earnings delivery, (ii) defensive earnings from its tank terminal businesses, and (iii) Pengerang Phase 3 acting as a main growth catalyst driver over the longer-term.

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 - 16 Aug 2019