INVESTMENT HIGHLIGHTS

• Dialog Group Berhad’s 3QFY19 reported earnings expanded by +18.7%yoy to RM145.2m

• Near-completion of EPCC projects impacted Malaysian operation’s revenue

• Tank farm business continues to expand by >100%yoy to RM57.2m

• First Interim dividend of 1.5sen was declared

• Upgrade to BUY with revised TP of RM3.50 per share

Reported earnings expanded by +18.7%yoy despite contraction in revenue. Dialog’s 3QFY19 reported earnings expanded by +18.7%yoy to RM145.2m. Its PATAMI however; climbed by +20.9%yoy to RM143.7m. This brings its cumulative 9MFY19 earnings to RM395.1m making up 83.7% and 89% of our and consensus’ full-year earnings forecasts respectively. Furthermore, after stripping out last year’s gain on fair value of RM65.0m, its 9MFY19 earnings is higher by +19.8%yoy. Earnings during the quarter continue to expand despite a -26.6%yoy contraction in revenue which is mainly attributable to lower revenue recognition from its Malaysian operation.

Malaysian operation affected by near-completion of EPCC contracts; however… The revenue from the Malaysian operations slumped by -24.7%yoy due to the near-completion of the EPCC works in Pengerang Deepwater Terminals Phase 2 projects. That said, on a quarterly sequential basis, the Malaysian operations’ revenue has improved by +49.7%qoq and this quarter-over-quarter improvement has been observed since 2QFY19. Meanwhile, earnings from Malaysian operation grew +70.2%yoy mainly attributable to the cost savings realised on completed projects and increased share of profits in joint ventures and associates.

Tank farm business continues to expand. Meanwhile, earnings from its tank farm business continues to expand during the quarter by >100%yoy to RM57.2m. The upbeat contribution is a result of Pengerang LNG (Two) Sdn Bhd which achieved its commercial operations and received first commercial LNG cargo at its newly commissioned regasification terminal at Pengerang Deepwater Terminal in November 2017.

Focus on tank farms remains. Pengerang Deepwater Terminal phase 3 has continued to make progress. Land reclamation for Phase 3 is now at 62% complete and is scheduled for completion end-2019. The construction of a storage terminal, common tankage facilities (including shared infrastructure) and deepwater marine facilities (Jetty 3) have also begun. The development of this terminal is the first of such terminals in Phase 3 and completion is expected in mid-2021.

Impact on earnings. Due to the better-than-anticipated earnings performance this quarter, we are revising our FY19-FY20F earnings by +8.6% and +8.3% respectively after we take into account improved profit margins from cost savings initiatives and higher contribution from its tank farm business.

Upgrade to BUY. In view of an improved earnings prospects primarily from cost savings and expansion of its tankage business – including those of Dialog Terminal 1, Dialog Terminal Langsat 2 and Dialog Terminal Langsat 3 which will ensure a sustainable growth and recurring income for the Group; we are upgrading our recommendation on Dialog to BUY (from Neutral previously).

Our upgrade is premised on the fact that we opine that Dialog will be one of the key beneficiaries of the soon-to-becompleted Pengerang Integrated Complex (PIC) which is scheduled to commence operations in 2020 – where PIC is now 97% completed. Dialog will be one of the key beneficiaries due to its exposure to the Pengerang Deepwater Terminals (PDT) tank terminals, Pengerang LNG Two (PNLG2) and its expertise in engineering, procurement, construction and commissioning (EPCC) as well as; maintenance services. We foresee that Dialog will be one of the front runners to grab new contract awards as there will be more plant maintenance jobs available for local players once the PIC commences with Petronas expected to award contracts to local oil and gas service providers up to the tune of RM5.0b in the coming one to two years.

Revised Target Price to RM3.50. Following the earnings revision, we have also revised our target price on Dialog to RM3.50 per share (from RM3.24 previously). Our TP valuation is based on sum-of-parts method pegging a PER of 28x to its core businesses i.e: EPCC, Plant Maintenance, Specialist and Catalyst. As for centralized tankage facilities business, discounted cash flow is based on a discount rate of 8%.

Source: MIDF Research - 15 May 2019