Despite a drop in revenue due to slower demand for downstream services, its 1QFY21 results still managed to come in within expectations, as its resilient mid-stream terminal businesses managed to sustain bottom-line. Given the current challenging environment, we see it difficult for DIALOG to replicate its double-digit earnings growth for the time being. Nonetheless, commencement of its Pengerang Phase 3A and Langsat Terminal expansion should provide ample growth opportunity beyond the immediate 1-2 years. Maintain OUTPERFORM but TP raised to RM4.35.

1QFY21 results within expectations. 1QFY21 core net profit of RM134.6m (arrived after stripping-off RM12m gains on disposal), came in within expectations at 21% of both our and consensus full-year estimates. No dividends were announced, as expected.

Slow start to earnings. YoY, 1QFY21 core earnings stayed relatively flattish (-1%). Revenue almost halved YoY, due to the slowdown in demand for its downstream O&M and EPCC services. However, bottom-line earnings were still sustained by its resilient mid-stream terminal businesses, which helped lift its associates’ contribution by 31% YoY, thanks to higher day rates coupled with recognition of some forex translation gains. QoQ, core earnings were down 14%, dragged by the lowered revenue due to slower O&M and EPCC works. This was partially offset by the higher associates’ contribution (+40%) from its terminal businesses, thanks to recognition of some forex translation gains on top of slightly higher day rates.

Challenging year. We see FY21 to be a mildly challenging year for DIALOG, given the overall slowdown in demand for its downstream services. Nonetheless, the resilience of its mid-stream terminal businesses may still provide a defensive baseline to earnings. All things considered, given the current circumstances, we opine that the group may not be able to replicate double-digit earnings growth for the time being – a feat which the group had consistently managed to deliver in recent history. Moving forward, Pengerang Phase 3A is still on track for commencement in FY22, while the group is also targeting to expand its Langsat Terminal facility by another 85k cubic meters by mid-FY22. These expansion plans should provide the group with ample growth opportunities beyond the immediate 1-2 years. That aside, DIALOG still has another 500 acres of land available for future developments in the Pengerang area.

Maintain OUTPERFORM, with SoP-TP raised to RM4.35 (from RM4.25 previously) as we roll forward our valuation base year to FY22E. No changes to our FY21-22E post-results.

Despite the slower immediate growth prospects, we still like DIALOG for: (i) recurring earnings from its tank terminal business to provide a defensive baseline, and (iii) future developments in Pengerang acting as a main growth driver over the long-term. Given DIALOG’s resilient balance sheet and recurring earnings nature, the group is better positioned to withstand the current sector downturn, as compared to other oil and gas services peers.

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 - 17 Nov 2020