Dialog's earnings mainly from local operations - The Edge Financial Daily

Dialog's earnings mainly from local operations 
20 May, 2016 
Source: The Edge Financial Daily
Dialog Group Bhd (May 19, RM1.57)
Maintain neutral with a higher target price (TP) of RM1.68 from RM1.57: Dialog Group Bhd's reported third quarter of financial year 2016 (3QFY16) earnings declined 7.8% year­on­year (y­o­y), but grew on a sequential quarterly basis by 1.2% quarter­on­quarter (q­o­q) to RM78.9 million.
The sustainably strong earnings were largely contributed by its Malaysian operations, which contributed some 74% of total earnings.
The company's cumulative nine months of FY16 (9MFY16) normalised earnings (excluding foreign exchange [forex] gain of RM19.2 million) broadly kept pace with our expectation, albeit at the higher end of our estimate, accounting for 79% of our full­year earnings forecast.
Earnings from the Malaysian operations which contributed approximately 74% of total earnings were higher due to higher work levels from the engineering, construction and fabrication activities of its ongoing projects.
These projects are Pengerang Deepwater Terminal Phase 2, Malaysia liquefied natural gas (LNG) Train 9, Toyo bullet tanks and Sabah ammonia and urea project piping works.
The company, however, acknowledged that sales of specialist products for the upstream segment have been sluggish.
The company's 9MFY16 net profit margin remains healthy at 11.9%, representing an increase of about 0.1 percentage points from a year earlier.
This is the sixth consecutive month the group has maintained a net profit margin in excess of 10%.
The tank farm business maintains its profitability for the third consecutive quarter at RM15 million.
This is largely attributable to increased contribution from the Pengerang independent terminal, which has fully leased out its storage capacity since 1QFY16.
The group continues to be bullish on the prospects of the Pengerang Deepwater Terminal.
In addition, the company noted that production in the Bayan field continues to be enhanced.
The company further noted that the RM2.7 billion joint venture with Petronas Gas Bhd (neutral; TP: RM19.63) for the development of LNG regasification facilities comprising a regasification unit and two units of 200,000 cubic metres LNG storage tanks with an initial send­out capacity of 3.5 million tonnes per annum is scheduled to be completed atend­2017.
We take this opportunity to adjust our FY16 and FY17 earnings upwards by 3.4% and 7.1% respectively. We are assuming higher contributions from the centralised tankage business in light of the relatively lower oil prices (albeit it's recovering steadily).
The relatively lower oil prices will continue to support the downstream petrochemical industry, while increasing demand for storage facilities. For the past 16 months, Dialog's share price has been trading within the narrow band of RM1.44 to RM1.70 per share.
At the current price, we believe that the company's capital upside is limited without significant rerating catalysts.
We are maintaining our "neutral'' recommendation with a revised FY16 TP of RM1.68 per share.
This represents an implied forward price­to­earnings ratio (PER) of 31.2 times. Our valuation is based on the sum­of­parts method, pegging a PER of 20 times to its core businesses (engineering, procurement, construction and commissioning, and plant maintenance, among others).
As for the centralised tankage facilities business, our discounted cash flow is based on a discount rate of 8%. — MIDFResearch, May 19