DIALOG’s 9MFY21 earnings came in below expectations amidst weaker 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 near trough valuations, providing a bargain entry opportunity. Maintain OP, albeit with a lowered TP of RM3.50 (+22% upside).

9MFY21 results below expectations. 9MFY21 core net profit of RM392.6m came in below expectations at 62% of our, and 68% of consensus, full-year earnings forecasts, largely due to weaker-than- expected contribution from its downstream services. Nonetheless, announced dividend per share of 1.2 sen (flat YoY) is within expectation.

Sequential rebound in results. QoQ, 3QFY21 core net profit of RM136.2m rebounded 12%, largely thanks to: (i) higher job flow in its downstream services, coupled with higher contribution from its upstream services amidst rebound in oil prices, leading to a 16% improvement in revenue, and (ii) more-than-doubling of its associates’ contribution, as the last quarter recognised expenses arising from its provision for deferred tax liabilities.

Cumulatively, however, 9MFY21 core net profit came in weaker by 12% YoY, dragged by slower downstream jobs, coupled with lower associates’ contribution following the aforementioned provision of tax liabilities.

Long-term outlook still intact. We see FY21-22 to be a mildly challenging period for DIALOG, given the overall slowdown in demand for its downstream services. Nonetheless, the resilience of its mid- stream terminal businesses may provide a defensive baseline to earnings, with its long-term outlook mostly intact. Moving forward, Pengerang Phase 3A has already commenced operations going into 4QFY21, 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, albeit with a lowered SoP-TP of RM3.50 (from RM4.35 previously). Post results, our FY21E/FY22E earnings are further slashed by 10%/6%, following lowered assumptions for downstream contributions. In addition, we have also cut our ascribed valuation to DIALOG’s downstream business to 11x PER (from 18x previously) to be more in line with peers’ mean valuations, reflective of the current challenging business environment.

That said, with the stock’s long-term outlook still mostly intact, we believe its shares at current level is a bargain buy. At the moment, the stock is trading at 2SD below its mean and very close to trough valuations.

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 - 20 May 2021