Better net margins for Dialog

27 Apr 2019

Source: Focus Malaysia


DIALOG'S consistent earnings- io-year CAGR of 19% - even during the industry downturn in 2014 amidst a sharp decline in oil prices has proven its defensive business model against oil price volatility. The group is expected to achieve 22% earnings growth in FY20 (vs 5-year historical CAGR of 19%) on the backof 54% growth in its joint venture and associate contributions(PT2SB). Meanwhile, net margins in the next three years are expected to improve to i8.9%-2o.o% from 13.8% in FY18 follow-ing consolidation of the Langsat tank terminals and lower pro-portion of EPCG & fabrication income. Land reclamation of i2iha for Pengerang Phase 3 is 47% completed and slated for completion by end of CY19. At this juncture, we understand that Dialog is in the midst of finalising its Phase 3A investment plan with an initial investment of RM2.5 bil. Therefore, we believe the announcement of the Phase 3 plan (possibly this year) - which would provide clarity on the potential client pro-file, equity stake,capacity as well as timeline - will be the long-awaited catalyst while eliminating replenishment risk for its EPCC & fabrication arm. We initiate coverage on Dialog with a Buy rating at a TP of RM3.76 (+18% upside), based on SOTP valuation.

MAHB has five major ongoing corporate developments: (i)finalisation of revised OA; (ii) finalisation of RAB frame-work; (iii) expansion of quality criteria to be incorporated into the QoS; (iv) implementation of departure levy; and(v) service enhancement capex. These complicated issues are inter-linked and will take time to reach an amicable resolution. MAHB also risks being dropped as a FBMKLGI constituent in the review on May 27, given that its market capitalisation is precariously ranked 35th pres-ently. MAHB's valuation is at its cheapest in the past four years. We think this is unjustified given that it is on a high earnings growth phase (two-year forward average of 19%) and capex will be fairly modest. At current levels,forward EV/EBITDA is at 2SI) below mean,substantially pricing inthe negatives, in our view. No change to our earnings forecasts and Buy call, but we reduce our TP to RM9.

KERJAYA Prospek secured its third construction job in 2019 worth RM438.8 mil from Kerjaya Prospek Property(KPP),a private property developer owned by controlling shareholder Datuk Tee Eng Ho. The 68-storey mixed development project consists of three blocks, located at Jalan Puchong and is over 42 months lip to November2022. The job award was highly anticipated following completion of piling works and signing of memorandum of cooperation with Marriot towards end-2018. This brings total jobs secured in 2019 to RM873mil or 87.3% of our RMi bil order book replenishment assumption. We expect future job wins would be limited amidst the cau-tious property market outlook. We downgrade our call to Hold (from Buy) with RM1.40 SOP-derived TP as we see limited upside.

1Q19 core earnings grew 6.0% yoy to RM238.9 mil as: (i)revenue increased by 1.6% to RM1.45 bil (+3.2% after adjusting for divestment of the chilled dairy business on Jan 1, 2019), underpinned by higher domestic sales(+4.9% yoy) on the back of commendable sales perform-ance during the Chinese New Year festivities; (ii) oper-ating margin improved +1.6 percentage points yoy, led by supply chain efficiency gains and phasing of market-ing and promotional expenses, offset by a higher effec-tive tax rate with the cessation of outstanding tax incen-tives. The results were broadly within both our and con-sensus expectations (33% of 2019E). Yet, we remain cau-tious of an uptick in raw material prices while there could be some volatility in demand arising from Nestle's export markets (about 22% of group turnover). We maintain our earnings forecasts as well as our Sell call.