FY20 core earnings (+12% YoY) came in slightly above our expectation on stronger terminal contributions, although dividends missed slightly as pay-out was lowered in efforts to conserve cash amidst current uncertainties. Nonetheless, key earnings catalysts are still in place, with the timely expansion of Pengerang Phase 3 and the Langsat Terminals. Maintain OUTPERFORM with raised TP of RM4.25.

Slightly above our expectation. FY20 core net profit of RM601.8m (arrived after stripping-off gains on disposal) came in slightly above our expectation at 107% of our full-year earnings forecast, mainly due to slightly stronger-than-expected contribution from its tanker terminals. However, the results are deemed broadly within consensus expectation at 103%. The company also announced a dividend of 1.9 sen per share, bringing YTD dividends to 3.1 sen – lower than last year’s dividends of 3.8 sen despite a 12% jump in core earnings YoY. This implies a drop in core earnings pay-out to 29%, versus 40% last year. This, unfortunately, came in below expectations, as the company had cited its decision to conserve cash in view of the challenging economic uncertainties in the short to medium-term.

Continued earnings growth. FY20 core earnings growth was mainly propelled by higher associates’ contribution, bolstered by the commencement of Pengerang Phase 1E during the year. This was able to offset the slight drop in revenue, most likely dragged by (i) lower downstream contributions from slower O&M and EPCC work orders, and (ii) lower upstream contribution due to weaker oil prices. For the individual quarter, 4QFY20 CNP grew 11% YoY, similarly thanks to the higher associate’s contributions from commencement of Pengerang Phase 1E, combined with a revenue growth of 20%, due to full commencement of Langsat Terminal 3 in the previous quarter. Sequentially, core earnings grew 4% QoQ, helped by full quarter contributions of Langsat Terminal 3 - resulting in a 7% improvement in revenue, on top of a 32% reduction in finance cost recognition due to accounting reasons. All these were able to offset lower associates’ income by 26%, as a result of forex translation losses incurred in Pengerang LNG2.

Sustained growth in place. With Pengerang Phase 1 and 2 in operations, Phase 3 is now expected to commence commercial operations in FY22, with land reclamation now completed and construction works currently ongoing. Beyond Phase 3, DIALOG still has another 500 acres available for future development in the Pengerang area. Meanwhile, DIALOG is also expanding its Langsat facilities by another 85k cubic meters of storage capacity, targeting operations by mid-FY22. An additional 17 acres of land is still available for expansion beyond this, potentially adding another 200k cubic meters in the long term to bring the total Langsat facilities to over 1m cubic meters (from 770k cubic meters currently).

Maintain OUTPERFORM. Post results, we raised our FY21E earnings by 6%, while simultaneously introducing FY22E numbers. Following the earnings upgrade, our SoP-TP is also raised to RM4.25 (from RM4.15, previously) – implying 33x PER on FY22E EPS. We continue to like DIALOG for its: (i) solid earnings delivery track record, (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 - 19 Aug 2020