Although dragged by slowdown in downstream services, DIALOG’s weaker FY21 (-10% YoY) still came in within expectations. Despite near-term challenges, the long-term outlook remains largely intact, with its resilient terminal business providing a defensive baseline to earnings. The stock is currently trading near trough valuations, providing a bargain entry opportunity. Maintain OP with TP of RM3.50.

FY21 results within expectations. FY21 core net profit of RM543m came in within expectations at 98% of our, and 102% of consensus forecasts. Meanwhile, proposed dividend of 1.9 sen is also within expectation, bringing full-year dividend to 3.1 sen (flat YoY).

Overall a weaker year. Overall, FY21 was a weak year for DIALOG, seeing a decline in earnings for the first time in the group’s recent history. Core net profit dropped 10%, dragged mainly by a slowdown in its downstream services, as seen in the drop in revenue, coupled with a mild drop in associates’ contributions given the recognition of a deferred tax liability expense earlier in the year for its Pengerang Phase 2 assets.

For the individual quarter of 4QFY21, CNP similarly declined 12%, mainly dragged by the slower downstream activities, while partially offset by the group’s higher mid-stream operations contribution as its Pengerang Phase 3A commenced operations during the quarter. Sequentially, earnings were largely flat (+2%), marginally helped by the slight increase in downstream activities.

Long-term outlook still intact. Despite near-term challenges amidst current lockdowns, DIALOG’s long-term outlook and earnings resiliency from its midstream assets remain largely intact. Petronas’ RAPID facilities are expected to commence within the year, and we believe this will help improve prospects for its Pengerang Phase 3, with the group still sitting on 500 acres of Pengerang land ready for future expansions. Going into FY22, Pengerang Phase 3A will see full-year earnings contribution, while the expansion for its Langsat Terminal facility by a further 85k cubic meters (from 770k currently) is expected to be completed by mid-FY22. We believe these, coupled with an expected recovery in downstream activities, should provide the group with ample growth opportunities in the coming 1-2 years.

Maintain OUTPERFORM, with unchanged SoP-TP of RM3.50 (implying 31x forward PER). The stock is currently trading at -2SD below its mean and near trough valuations. In fact, based on our SoP valuations, the current share price has practically not taken into account its Pengerang Phase 3 or any future growth from Pengerang. As such, with the long- term outlook mostly intact, we believe DIALOG is a compelling bargain buy.

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 - 20 Aug 2021