INVESTMENT HIGHLIGHTS

• Dialog Group Berhad’s 4QFY19 earnings expanded by +21.6%yoy to RM140.7m

• Higher revenue from Malaysian operation offset by compressed margins from international operations

• Tank farm business continues to expand by +79%yoy to RM51.1m

• Second Interim dividend of 2.3sen was declared

• Maintain BUY with revised TP of RM3.83 per share

Reported earnings expanded by +21.6%yoy despite contraction in revenue. Dialog’s 4QFY19 earnings expanded by +21.6%yoy to RM140.7m. This brings its cumulative FY19 earnings to RM535.8m making up 104% and 106% of our and consensus’ full-year earnings forecasts respectively. Furthermore, after stripping out last year’s gain on fair value of RM65.0m, its FY19 earnings is higher by +20.5%yoy. Earnings during the quarter continue to expand despite a -26.0%yoy contraction in revenue which is mainly attributable to lower revenue recognition from its international operation.

Higher revenue recognition from Malaysian operations however…Revenue from the Malaysian operations during the quarter saw better performance mainly attributable to midstream and downstream activities in particular from the engineering, construction, and; plant maintenance services performed in various projects. Additionally, Dialog also recorded higher profit from joint ventures and associate. However, this better performance from the Malaysian operation was offset by its international operations which saw margin compression due to heightened competition.

Tank farm business continues to expand. Meanwhile, earnings from its tank farm business continues to expand during the quarter by 79%%yoy to RM51.1m. 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 scheduled for completion by 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 FY20F earnings to RM563.6m (from RM558.7m previously). We are also introducing our FY21F numbers in this report.

Maintain BUY. In view of continuously improving 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 maintaining our BUY recommendation on Dialog at this juncture.

Our BUY recommendation is premised on the fact that we opine that Dialog will be one of the key beneficiaries of the soon-to-be-completed 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 RM3.83. We have also revised our target price on Dialog to RM3.83 per share (from RM3.50 previously) as we roll forward our valuation base year to FY21. 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 - 16 Aug 2019