INVESTMENT HIGHLIGHTS

• Dialog Group Bhd’s 3QFY18 reported earnings surged by +25.8%yoy to RM118.8m

• 9MFY18 normalised earnings (excluding fair value gain) within expectations

• Tank farm business expanded by +24.2%yoy to RM97.7m

• FBMKLCI Index inclusion potential

• Maintain NEUTRAL (upside bias) with revised TP of RM3.24 per share

Strong earnings growth recorded. Dialog’s 3QFY18 earnings grew by +25.8%yoy to RM118.8m. Its cumulative 9MFY18 normalised earnings (excluding fair value gain on disposal) which amounted to RM329.9m (+23.5%yoy) kept pace with our and consensus expectations, accounting for 74% and 78% of full year earnings estimates respectively.

Malaysian operations on solid footing. Approximately 87% of the group’s earnings up to 9MFY18 is contributed by the Malaysian operations. The growth of profit from local operations is largely attributable to revenue consolidation of Langsat Terminals since it was acquired in September 2017.

Tank farm business expanding. Earnings from its tank farm business for the quarter expanded by +11.2%yoy to RM31.8m. The upbeat contribution is a result of Pengerang LNG (Two) Sdn Bhd which achieved its commercial operations and received the first commercial LNG cargo at its newly commissioned regasification terminal at Pengerang Deepwater Terminal in November 2017.

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.

FBMKLCI Index inclusion potential. Dialog Group, being in the reserve list of the FBMKLCI index, has the potential to be included in the as members of the index due to the significant increase in its market cap value over the recent months.

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 41x. Given the strong global crude oil price and strong downstream sub-segment of the value chain, we are revising our target price upward to

RM3.24 per share (previously RM2.83), whilst being cognizant that the revaluation is also largely attributable to the share’s potential inclusion into the FBMKLCI. Due to the share’s lofty valuation (four-year PER high), we remain

Neutral with positive bias on Dialog. Our valuation is based on a sum-of-parts method pegging a PER of 28x 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 2018