KEY INVESTMENT HIGHLIGHTS

• Dialog Group’s 1QFY20 normalised earnings met expectations at RM136.1m

• International operations profit boosted by increased engineering and construction activities

• Maiden contribution from partially commissioned Dialog Terminal Langsat 3

• Tank farm business contribution hit record high of RM57.8m

• FY20-21F earnings maintained

• Maintain BUY with an unchanged TP of RM3.83 per share

1QFY20 earnings met expectation. Dialog Group’s (Dialog) 1QFY20 normalised net profit - excluding a one-off fair value gain on deemed disposal of a joint venture of RM28.4m, came in at RM136.1m. This is within our and consensus’ full-year earnings estimates at 24.1% and 23.5% respectively. Comparing against 1QFY19, its normalised earnings grew by +18.7%yoy. This is despite a -6.5% contraction in revenue year-over-year. However, on a quarterly sequential basis revenue grew by +43.7% whilst earnings excluding EI contracted slightly by -3.3% respectively. This was driven by improved performance from both its local and international operations which is mainly derived from its downstream plant maintenance services.

International operations posted higher profit. The improved performance from its international operations during the quarter has helped to boost earnings. Dialog’s international operations recorded a higher net profit after tax during the quarter led by its Middle East operation. The higher net profit was mainly attributed to higher engineering and construction activities as well as; increase in specialist products and services sales.

Maiden contribution from Dialog Terminal Langsat 3. It is noted that the quarter also saw the maiden contribution from Dialog Terminal Langsat 3 partial-commissioning of its 115,000cbm storage facility. Dialog Terminal Langsat 3 was partially commissioned back in August 2019 and will be fully commissioned by end-CY19. However, we understand that while there was contribution from Dialog Terminal Langsat 3, it was still minimal as of end 1QFY20. In addition, Management disclosed that SPV Phase 1E was also partially commissioned at the end of September 2019. We understand from Vopak’s recent analyst briefing that SPV Phase 1E is expected to fully commission in 4QCY19.

Tank farm business contribution hit record high. Meanwhile, earnings coming from Dialog’s tank farm business continue to expand during the quarter by +87%yoy to a record high of RM57.8m. The contribution from the tank farm business was boosted mainly by Pengerang Terminals 2 Sdn Bhd (PT2SB).

FY20-21F earnings projections remain intact. Following the earnings announcement, we made no changes to our FY20-21F earnings projections. At this juncture; we opine that Dialog is set to meet our earnings estimates.

Maintain BUY with an unchanged TP of RM3.83. Post earnings announcement, we are maintaining our BUY recommendation on Dialog with an unchanged target price of RM3.83. Our valuation is derived from a sum-of-parts method pegging a PER of 28x to its core businesses i.e: EPCC, Plant Maintenance, Specialist and Catalyst. We have also assigned an 8% discount rate on its discounted cash flow for its centralized tankage facilities business. Our BUY recommendation is premised on our expectation of an increase in contribution coming from its growing tank farm business with the completion of the SPV Phase 1E’s 430,000cbm which is expected to fully commission in 4QCY19. In addition, we are also expecting earnings to be boosted by the full commissioning of Dialog Terminal Langsat 3’s first 115,000cbm which was partially commissioned back in August 2019. Furthermore, with the completion of Pengerang Deepwater Terminal (PDT) Phase 2 and the refineries in RAPID as well as; the recently awarded Groupwide Master Service Agreement from PETRONAS, we opine that Dialog’s bottomline will continue to be in a positive growth trajectory going forward. Dialog remains as our Top Pick in the oil and gas sector given its; (i) stable recurring income; (ii) front-line beneficiary to RAPID Pengerang’s operations and; (iii) growing tank farm business.

Source: MIDF Research - 12 Nov 2019