Dialog Group Bhd
(Feb 10, RM1.66)
Downgrade to market perform with an unchanged target price of RM1.67. Core second quarter of financial year ended Dec 31, 2015 (2QFY15) net profit came in at RM76.4 million, bringing its cumulative first half of FY15 (1HFY15) core net profit to RM126.3 million.

This is within our and consensus forecast at 50.8% and 49.5% respectively. Our core net profit forecast excluded a RM23.4 million gain on disposal of other investments and RM20 million write-off of non-recoverable cost in upstream activities.

In 2QFY15, core net profit gained 15% despite a 17.8% drop in revenue year-on-year (y-o-y), primarily driven by better margins from the Middle East contributions in the quarter compared with the previous year and Singaporean operations turning a profit of RM1.4 million from a loss of RM900,000 in the corresponding period last year.

Core net profit surged 53.0% quarter-on-quarter, mainly underpinned by higher jointly controlled entities contributions (core contribution of RM13.8 million once RM20 million write-off is excluded) and better operating margins for the Middle East operations.

For 1HFY15, core net profit surged 10.7% y-o-y on the back of better overall earnings from its Singaporean operations and maiden earnings contribution from its Middle East operations in FY15.

Meanwhile, group top line dropped y-o-y due to the high base effect created in FY14 when engineering, procurement, construction, and commissioning (EPCC) revenue for the Pengerang Deepwater Terminal Phase 1A and 1B were recognised. Phase 1 will soon be running at full steam with Phase 1A and 1B commencing operations, and 1C under a commissioning phase at present.

Phase 2 is certain to proceed ahead with a shareholder’s agreement signed with Vopak Terminal Pengerang BV for the development and construction of storage facilities for the Refinery and Petrochemical Integrated Development (Rapid) complex.

It is expected to add another 2.1 cu m of storage capacity targeted to reach completion by 2019.

This is also expected to contribute positively to the group’s EPCC division with Dialog’s portion amounting to RM5.5 billion.

Dialog has entered into a joint venture (with a 25% equity stake) in the upcoming Pengerang regasification project. Earnings are expected by 2018 (completion by 4Q17).

Overall, we believe that the group is on track to build on its long-term recurring income stream generating an asset base with multiple tank terminals put in place to capitalise on the potential growth in Malaysia’s downstream sector in Rapid.

We maintain our forecasts for now, as we deem the results to be within expectations. While we still like the stock for its growing tank terminal portfolio which provides recurring income, we believe the near-term positives have been priced in by the market. It is trading at 30.3 times FY15 price-earnings ratio (PER), at +0.5 standard deviation from its eight-year mean PER. — Kenanga Research, Feb 10

This article first appeared in The Edge Financial Daily, on February 11, 2015.