Investment Highlights

• Dialog Group Bhd’s 1QFY18 reported earnings expanded by nearly 100% to RM160.9m

• Fair value gain on acquisition of RM65.6m recorded

• Normalised profit of RM89.8m expanded by +10.5%yoy

• Tank farm business expanded by +8.1%yoy to RM27.1m

• Maintain NEUTRAL (upside bias) with unchanged TP of RM2.16 per share

Steady earnings growth. Dialog reported profit in excess of RM160m, representing growth of nearly 100% largely due to fair value gain recorded on acquisition of the 45% equity interest in Centralised Terminals Sdn Bhd from MISC Bhd. The fair value gain recorded totalled RM65.6m. Excluding the fair value gain on acquisition and on disposal of PPE, Dialog’s normalised earnings is RM89.9m, representing growth of +10.5%yoy. 3MFY18 earnings came in within expectations, accounting for 20.3% and 22.3% of our and consenses full year FY18 earnings estimates respectively.

Malaysian operations on solid footing. Over 90% of the group’s earnings is contributed by the Malaysian operations. Local revenue expanded by 24.4%yoy, mainly from the E&C and plant maintenance divisions. Despite this, its upstream activities remain sluggish.

Tank farm business expanding. Earnings from its tank farm business expanded by +8.1%yoy to RM27.1m as good take-ups were recorded from the group’s operations in Pengerang, Tanjung Langsat and Kertih.

Focus on tank farms moving forward. Dialog’s strategy is clear – immediate to long-term focus on tank farms. Pengerang Deepwater Terminal Phase 1 is being expanded by 430,000m3 while construction of Phase 2 is on schedule. The company also indicated that new potential partners are being secured for Phase 3.

Maintain Neutral with positive bias. Dialog’s share price has been volatile on the upside, stoked by positive news flows from Pengerang and solid earnings. The company’s forward PER is currently at 27x, below its two-year historical average. We are maintaining our NEUTRAL (with positive bias) recommendation with an unchanged TP of RM2.16 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 - 22 Nov 2017