DIALOG’s 1HFY21 earnings dipped as a result of an accounting provision of tax liabilities for its midstream assets, coupled with weaker upstream and downstream contributions. Nonetheless, its long-term growth outlook remains intact, with its resilient terminal business providing a defensive baseline to earnings. The stock is currently trading at trough PER valuations, providing a bargain entry opportunity. Maintain OUTPERFORM with TP of RM4.35.

1HFY21 results below expectations. 1HFY21 core net profit of RM256m came in below expectations at 40% of our, and 41% of consensus, full-year forecasts, dragged by weaker-than-expected contribution from its midstream terminal assets as a result of finalisation of its assets costs and provision for deferred taxation liabilities. This is on top of slower EPCC and O&M activities, coupled with weaker upstream contributions. No dividends were announced, as expected.

Weaker overall earnings. Sequentially, 2QFY21 saw a 10% QoQ dip in core earnings, on the back of significantly lowered associates’ contribution. As aforementioned, its midstream terminal assets (namely 25%-owned Pengerang Phase 2 terminals) underwent an asset cost finalisation and provision for deferred taxation liabilities during the quarter. This resulted in a one-off cost impact of ~RM30-40m to DIALOG. Note that these costs are purely accounting and are non- cash in nature, which managed to offset the slight increase in downstream activities QoQ. Meanwhile, cumulatively 1HFY21 also saw a 13% decrease in core earnings. Aside from the poorer aforementioned midstream contributions, the group also suffered from lower downstream activities and poorer upstream contributions, as reflected in its lower revenue.

Long-term outlook still intact. We see FY21 to be a mildly challenging year for DIALOG, given the overall slowdown in demand for its downstream services. Nonetheless, the resilience of its midstream terminal businesses may still provide a defensive baseline to earnings, with its long-term outlook mostly intact. Moving forward, Pengerang Phase 3A is still on track for commencement in FY22, while the group is also targeting to expand its Langsat Terminal facility by another 85k cubic meters by mid-FY22. These expansion plans should provide the group with ample growth opportunities in the next 1-2 years. That aside, DIALOG still has another 500 acres of land available for future developments in the Pengerang area.

Maintain OUTPERFORM, with unchanged SoP-TP of RM4.35. Post- results, we mildly cut our FY21E/FY22E earnings assumption by 6%/3%, after factoring weaker midstream and downstream contributions.

Currently, the share is trading close to its trough valuation at 26x PER, which is roughly -2SD below its 3-year mean of 35x. With its long-term outlook remaining mostly intact, we believe the current level is a bargain buying opportunity.

Risks to our call include: (i) lower utilisations of its tank terminals, (ii) slowdown in downstream jobs flow, and (iii) delay in the development of Pengerang Phase 3.

Source: Kenanga Research - 10 Feb 2021