INVESTMENT HIGHLIGHTS

• Dialog Group’s 3QFY17 reported earnings grew by +19.6%yoy to another record high of RM94.4m

• Normalised cumulative earnings exceeded expectations

• Bulk of earnings boost from Malaysians operations

• 9MFY17 tank farm business contributed RM78m

• Maintain NEUTRAL with revised TP of RM1.88 per share

3QFY17 normalised earnings exceeded expectations. Dialog’s reported 3QFY17 earnings increased by +19.6%yoy to another record high of RM94.4m. 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 RM78.7m for 9MFY17. Excluding cumulative gains on disposal of assets amounting to RM22.4m and forex gains of RM14.8m, the group’s 9MFY17 normalised earnings of RM229.9m exceeded our expectations, accounting for 84.8% of our full year earnings estimates but still fell within consensus estimates.

Tank farm business going strong. The company noted that the commendable rise in profit was largely due to its tank farm business. In addition to that, the Malaysian operations were buoyed by ongoing works at the 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 3QFY17 net profit margin remains healthy at above >10%, while its 9MFY17 blended net profit margin is at 11%.

Impact on earnings. Due to the higher activity levels seen, we are increasing our FY17 and FY18 earnings estimates by +12.6 and +11.7% respectively.

Maintain NEUTRAL. Dialog’s share price for the past five months has been volatile on the upside, stoked by positive news flows from Pengerang and solid earnings. The company’s forward PER is currently at 32x, representing a two and a half year high. We are maintaining our NEUTRAL recommendation with a revised TP of RM1.88 per share. 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 - 17 May 2017