• Dialog Group’s 4QFY17 reported earnings jumped +32.9%yoy exceeding RM100m for the first time

• Normalised cumulative earnings largely within expectations but lacked consensus

• Strong showing from joint venture projects

• 80% of earnings from Malaysian operations

• Maintain NEUTRAL (with upside bias) with revised TP of RM1.99 per share

4QFY17 normalised earnings kept pace with expectations. Dialog’s reported 4QFY17 earnings increased by +32.9%yoy to another record high of RM103.5m. 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 RM107m for FY17. Excluding cumulative gains on disposal of assets amounting to RM22.45m, forex gains of RM20.2m and rental income of RM11.5m, the group’s full year FY17 normalised earnings of RM316.5m kept pace with our expectations but lagged consensus forecasts.

Malaysian operations kept busy. 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 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 FY17 net profit margin remains healthy above >10%, despite registering a slight decline compared with FY16.

Impact on earnings. We take this opportunity to fine tune our FY18 earnings forecast to RM379m.

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 28x, below its two-year historical average. We are maintaining our NEUTRAL (with positive bias) recommendation with a revised TP of RM1.99 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 Aug 2017