DIALOG’s 1QFY20 core net profit (+19% YoY, -3% QoQ) came within expectations. YoY growth was helped by its tanker business – mainly the commencement of Pengerang Phase 2, while slightly weaker QoQ results were due to EPCC cost savings in prior quarters. Moving forward, we expect Pengerang Phase 3 to be the main growth driver, with targeted commencement in mid-CY21. Maintain OUTPERFORM with SoP-TP of RM4.15.

1QFY20 results within expectations. DIALOG recorded 1QFY20 core net profit of RM136.1m (arrived after stripping off fair value gain on disposal of a joint-venture of RM28.5m), coming in within expectations at 24%/23% of our/consensus full-year earnings forecasts. No dividends were announced, as expected.

1QFY20 stronger YoY, weaker QoQ. YoY, 1QFY20 core net profit jumped 19%, driven by higher contributions from JV and associates, on the back of its tanker business – mainly Pengerang Phase 2, which commenced operations in Nov 2018.

QoQ, 1QFY20 core net profit slightly deteriorated 3% due to lower margins, as last quarter recorded some cost recovery from tail-end stages of EPCC for Pengerang Phase 2. Notably, its revenue line had actually managed to surge QoQ, suggesting a pick-up in EPCC works for Pengerang Phase 3.

Pengerang Phase 3 driving long-term growth. Moving forward, we view Pengerang Phase 3 as the main growth driver for DIALOG in the coming years. We expect the first phase of Pengerang Phase 3 to be ready by mid-CY2021, starting off with a gross storage capacity of ~3m cubic meters. 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 cubic meters (DIALOG: 90% stake), and as such, we believe securing further clients could be in the pipelines. Beyond Pengerang Phase 3, DIALOG has approximately another 500 acres of land within the Pengerang area available for future development.

Maintain OUTPERFORM, with unchanged SoP-derived TP of RM4.15 – 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 - 12 Nov 2019