August 19, 2019 [The Edge Markets] – Maintain add with a lower target price of RM4.48: Dialog Group Bhd’s fourth quarter of financial year ending 2019 (4QFY19) core net profit of RM136 million was 30% higher year-on-year, while FY19 core net profit of RM538 million was 26% higher.

 
The strong FY19 earnings growth was driven by: i) an increase in Dialog’s stake in the Langsat terminals to 100% during FY19, from a time weighted average of 72.4% in FY18; ii) higher weighted-average oil prices in FY19 as well as the likelihood of higher production volumes; and iii) the booking of cost savings in FY19 with the completion of the Pengerang Terminal Two (SPV2) engineering, procurement, construction and commissioning (EPCC) work, as project costs came in below budget. This more than offset lower EPCC revenues as Dialog approached the tail end of the SPV3 construction period.
 
SPV2 began earning jetty revenue when it received its first very large crude carrier crude cargo on Sept 22, 2018, and we expect it to have begun earning storage revenue from the second quarter of calendar year 2019 (2QCY19) onwards, given that the original timeline for the commissioning of Petronas Refinery and Petrochemical Integrated Development refinery was 1QCY19, and since the SPV2 crude and refined oil tanks are on a take-or-pay basis. As Petronas Chemicals Group Bhd is expected to commission its plans progressively in 3QCY19 and 4QCY19, SPV2’s petrochemical tanks are also poised to contribute revenue from 2HCY19.
 
The initial 100,000 cubic metres (cu m) tanks at Langsat 3 began partial operations from August 2019, and the 430,000 cu m tanks at SPV1 Phase 1E expansion — which is also for clean product storage — should begin commercial operations from 4QCY19. Hence, underlying tank terminal earnings for Dialog in financial year 2020 forecast (FY20F) will have three engines — SPV2, SPV1 Phase 1E, and Langsat 3. Despite this, our FY20F core earnings per share growth is minimal, because FY19 benefitted from the recognition of one-off EPCC gains from the completion of the SPV2 project, as costs had come in lower than budgeted. Another round of growth is expected in FY22F, as BP Singapore’s 430,000 cu m clean tanks at Pengerang Phase 3 (PP3) is expected to begin commercial operations from mid-CY21F.
 
In our meetings with investors in the past two months, the most common question was whether Dialog needed new equity money on the basis of all its upcoming projects. On the assumption that banks will be willing to fund 80% of the SPV2 and PP3 project capital expenditure, our calculations suggest that Dialog will have enough cash on its balance sheet in the next three to four years and will not need to raise more equity, even if it invests in up to two new specialty chemical plants.

 
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