DIALOG reported a strong 2QFY20 (+16% QoQ, YoY), coming in within expectations, helped by higher terminal business and downstream contributions. Moving forward, Pengerang is expected to be the main growth driver as Phase 3 is on track for a mid-CY21 commencement, while another 500 acres of land is available for further development. Maintain OUTPERFORM with SoP-TP of RM4.15.

1HFY20 results within expectations. DIALOG recorded 1HFY20 core net profit of RM294.2m (arrived after stripping-off gains on disposals), coming in within expectations, at 53% of our, and 50% of consensus, full-year earnings estimates. No dividends were announced, as expected.

Stronger results all round. 2QFY20 recorded a core net profit of RM158.1m, jumping 16% YoY, due to higher associates’ contribution as a result of the group’s terminal business (in particular, Pengerang Phase 2A which provided full-quarter contribution only in 2HFY19 onwards). Sequentially, the quarter saw its core net profit surging by 16%, as the group performed a mix of higher margin downstream jobs during the quarter, as well as the partial commencement of Langsat 3 (120k cubic meters capacity, 100% stake) since Aug 2019. Cumulatively, 1HFY20 bottom line leapt a healthy 17%, similarly due to higher associates’ contribution from terminals business.

Pengerang as key growth driver. In Pengerang, land reclamation works for Phase 3 has been completed, and is on track for a mid-CY21 commencement. Phase 3A will first kick off with its long-term storage agreement with BP Singapore for a capacity of 430k cubic meters (DIALOG’s stake at 90%), with securing of more clients down in the pipeline. Eventually, we believe Phase 3 would operate with a capacity of ~3m cubic meters. Beyond that, DIALOG has also another 500 acres of land within the Pengerang area available for future development. In the more immediate term, Langsat 3 has just commenced full operations with 120k cubic meters storage facility in Jan 2020, which bode well for its upcoming quarters. DIALOG has long-term plans to eventually expand Langsat 3 into a 300k cubic meters storage facility.

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. No changes to our FY20-21E numbers post-results. Nonetheless, we continue to like DIALOG for: (i) solid track record of earnings delivery, (ii) defensive business with recurring 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) slowdown in downstream jobs flow, and (iii) delay in the development of Pengerang Phase 3.

Source: Kenanga Research - 14 Feb 2020