KEY INVESTMENT HIGHLIGHTS

• Dialog Group’s FY20 reported earnings exceeded expectations at RM601.8m
• Profit boosted by higher revenue recognition from terminals business i.e: Dialog Terminals Langsat 1,2 & 3
• Better contribution from newly commissioned Dialog Terminal Langsat 3 and SPV Phase 1E
• Tank farm business contribution recorded at RM74.1m
• FY21F earnings revised upwards by +7.5% to RM613.2m
• Maintain BUY with a revised TP of RM4.11 per share

4QFY20 earnings met expectation. Dialog Group’s (Dialog) 4QFY20 reported net profit came in at RM156.7m. This brings its cumulative FY20 earnings to RM601.8m which was above our and consensus’ fullyear FY20 earnings estimates at 106.8% and 108% respectively. Comparing against 4QFY19, its reported earnings grew by +11.4%yoy in-line with the +20.2%yoy growth in its revenue. This was mainly due to the improved performance from its local Malaysian operation which was mainly attributable to the higher contribution from its terminal business namely Dialog Terminals Langsat 1, 2 and 3 as well as Pengerang Independent Terminal (PITSB). Similarly, on a quarterly sequential basis; revenue grew by +6.8% whilst earnings improved marginally by +3.8% respectively.

International operations profit contracted in FY20. Dialog’s international operations’ revenue grew by +9.6%yoy in FY20. However, it recorded a contraction in profit during the year mainly due to its Middle East operations which saw a decline of -11.7%yoy and - 33.3%yoy in terms of revenue and earnings respectively. The decline was attributable to reduced supply base activities in Saudi Arabia and lower margin earned on specialist products and services sales as well as; engineering and construction activities performed.

Increased contribution from newly commissioned terminals. It is noted that the quarter also saw increased contribution from Dialog Terminal Langsat 3 full commissioning of its 120,000cbm storage facility. Recall that, Dialog Terminal Langsat 3 was partially commissioned back in August 2019. In addition, SPV Phase 1E’s 430,000cbm was also fully commissioned at the end of end-2019. This brings the total storage capacity at Dialog Terminals Langsat 1,2, 3 and PITSB to 770,000cbm and 1,780,000cbm respectively. We understand from the Management that these storage capacities are currently fully leased out and the rates have also increased by +30-40% recently due to the increased demand for storage facilities arising from the low oil price.

Tank farm business contribution increased +45.0%yoy. Meanwhile, earnings coming from Dialog’s JV tank farm business (excluding one-off foreign currency translation from PLNG2 of about RM20.0m) expanded by +45.0%yoy during the quarter to RM74.1m. The contribution from the tank farm business was boosted mainly by Pengerang Terminals 2 Sdn Bhd (PT2SB).

FY21F earnings projections lifted by +7.5%. Following the better-than-expected earnings announcement, we have lifted our FY21F earnings projections by +7.5% to RM613.2m (from RM570.5m previously) as we take into account the better margin recognition across its business segment. We have also introduced our FY22-23F numbers in this report.

Maintain BUY with a revised TP of RM4.11. After revising our FY21F earnings and rolling forward our valuation base year to FY21, we are maintaining our BUY recommendation on Dialog with a revised target price of RM4.11 (from RM3.83 per share previously). 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 we understand has fully commissioned in 4QCY19. In addition, we are also expecting earnings to be boosted by the full commissioning of Dialog Terminal Langsat 3’s first 120,000cbm which has fully commissioned back in January 2020.

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 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 - 19 Aug 2020