• Dialog Group’s 2QFY17 reported earnings grew by +17.1%yoy to record high of RM91.4m

• Quarterly normalised earnings excluding gains on disposal of assets is RM86.8m

• 6MFY17 tank farm business almost double to RM50.1m

• Maintain NEUTRAL with unchanged TP of RM1.68

QFY17 normalised earnings within estimates. Dialog’s reported 2QFY17 earnings increased by +17.1%yoy to RM91.4m. The large portion of the profits were derived locally amidst challenging global environment. In particular, the strong earnings were derived from jobs in Pengerang whilst partly supported by the storage tank business which contributed RM50.1m for 6MFY17. Excluding gains on disposal of assets amounting to RM22.3m, the group’s normalised earnings of RM152.4 came in within our and consensus estimates, accounting for 55% and 49% of full year FY17 earnings expectations respectively.

Tank farm business going strong. The company noted that the commendable rise in profit was largely due to its tank farm business which was fully leased with better storage rates. In addition to that, the Malaysian operations were buoyed by ongoing works at Pengerang Deepwater Terminal Phase 2, Jetty topside works for Samsung and the construction of the plasticizer plant for UPC Chemicals.

Margins intact. The company’s 2QFY17 net profit margin remains healthy above >10%, while 6MFY17 blended net profit margin is at 11.4%.

Impact on earnings. We are maintaining our FY17 and FY18 earnings forecasts at this juncture.

Maintain NEUTRAL. For the past 24-months, Dialog’s share price has been unexciting, trading within the narrow band of RM1.44-1.70 per share. At current price, we believe that the company’s capital upside is limited without significant re-rating catalysts. We are maintaining our NEUTRAL recommendation with an unchanged TP of RM1.68 per share. This represents an implied forward PER of 28.6x. Our valuation is based on a sum-of-parts method pegging a PER of 20x to its core businesses ie. EPCC, Plant Maintenance, Specialist and Catalyst. As for the centralized tankage facilities business, our discounted cash flow is based on a discount rate of 8%.

Source: MIDF Research - 15 Feb 2017