KEY INVESTMENT HIGHLIGHTS

• Dialog Group’s 1QFY21 reported earnings met expectations at RM146.6m

• 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 RM75.8m

• FY21-22F earnings maintained

• Maintain BUY with a revised TP of RM4.30 per share

1QFY21 earnings met expectation. Dialog Group’s (Dialog) 1QFY21 reported net profit came in at RM146.6m which was within our and consensus’ full-year FY21 earnings estimates at 23.9% and 24.5% respectively. Comparing against 1QFY20, its reported earnings grew by +7.7%yoy despite the -48.6%yoy decline in its revenue. The lower revenue recorded during the quarter was mainly attributed to the slower downstream activities coupled with the drop in upstream oil prices. That said, its earnings expanded by +7.7%yoy during the quarter primarily driven by its recurring tank farm business and ongoing cost rationalization initiatives. Similarly, on a quarterly sequential basis; revenue declined by -38.57% whilst earnings dipped marginally by - 6.42%qoq respectively. The quarter also saw a lower-than-usual tax rate of 6% incurred which was due to its overprovision from FY20. That said, we expect the tax rate to normalize in the coming quarters.

International operations dragged earnings in 1QFY21. Dialog’s international operations’ revenue continued to contract by -25.6%yoy in 1QFY21 primarily due to reduced business as a result of the COVID-19 pandemic. Consequently, it recorded a contraction in profit of -51.0%yoy during the year mainly due to its Middle East operations which saw a decline of -46.7%yoy and -82.1%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. The quarter also saw increased contribution from Dialog Terminal Langsat 3 full commissioning of its 120,000cbm storage facility. In addition, SPV Phase 1E’s 430,000cbm was also fully commissioned at the end of end2019. This brought 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 been holding up post the COVID-19 pandemic outbreak. Recall that, the storage rate has increased by +30-40% recently due to the increased demand for storage facilities arising from the low oil price.

Tank farm business contribution increased +138.4%yoy. Meanwhile, earnings coming from Dialog’s JV tank farm business (excluding one-off foreign currency translation from PLNG2 of about RM10.0m) expanded by +138.4%yoy during the quarter to RM65.8m. The contribution from the tank farm business was boosted mainly by Pengerang Terminals 2 Sdn Bhd (PT2SB).

FY21-22F earnings estimates maintained. We are making no changes to our FY21-22F earnings estimates at this juncture as we opine that Dialog is on track to meet our FY21 earnings projections.

Maintain BUY with a revised TP of RM4.30. After updating our valuation parameters in FY21, we are maintaining our BUY recommendation on Dialog with a revised target price of RM4.30 (from RM4.11 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 - 17 Nov 2020