Investment Highlights

• We maintain BUY on Dialog with a lower sum-of-parts based fair value (FV) of RM2.91/share (16% reduction from RM3.46 previously) to incorporate a more prudent P/E based valuation methodology to its downstream business segment. The FV implies a 1-year forward PE of 25x, at-par with its 10-year average, and reflects a neutral 3-star ESG rating.

• We peg our downstream earnings to a lower P/E multiple of 12x (vs. 18x previously) based on the average 1-year forward of local oil and gas contractors as Dialog’s outlook in technical/specialist, plant maintenance and engineering/ procurement/construction/commissioning (EPCC) services remains in line with its subsector peers.

• Additionally, we now incorporate net present value (NPV) contribution from the group’ 90% effective stake in Terminal Pengerang 5 (PT5) based on a capex of RM1.6bil, IRR of 10.4% and a WACC of 7%, rather than a broad-based approach in valuing the total NPV contribution from Pengerang Phase 3, which remains uncertain for now.

• We maintain FY24F-FY26F earnings as Dialog’s 1HFY24 core net profit (CNP) (excluding forex gains of RM1.2mil and fair value gains on investments of RM1.2mil) came in broadly within expectations at 48% of our FY24F earnings and 49% of street estimates. As a comparison, 1H accounted for 49%-51% of full-year CNP for the last 3 years (FY21-FY23). No interim dividend was declared as expected.

• YoY, the group’s 1HFY24 revenue rose 8.7%, driven primarily by its international operations, particularly (i) Jubail Supply Base in Saudi Arabia, and (ii) sale of specialist products and services in foreign markets. 1HFY24 CNP rose slightly higher by 9.7% due to stronger EBITDA margins, which improved by 650bps from shrinking losses for its legacy EPCC contracts.

• QoQ, 2QFY24 revenue rose sequentially by 10% due to stronger contribution from its midstream Malaysian businesses which saw increased occupancy rates, particularly at DIALOG Terminals Langsat and PT5 – which more than offset weaker recognition of construction progress from its legacy EPCC contract.

• We also gather that the independent terminals business remains resilient amidst the Red Sea crisis with tank utilisation sustained at 90%-95% and monthly spot storage rates holding above the SG$6 per cubic meter (cbm) levels.

• 2QFY24 CNP saw a smaller increase of 5.

• Over the near term, we continue to see a sequential recovery in downstream profit margins, albeit with a slower pace due to persistently high project costs. Meanwhile, earnings from the midstream tank terminal segment should remain stable amidst resilient occupancy rates and monthly spot storage rates while the upstream segment will continue to benefit from elevated oil prices.

• Over the longer term, there remains ample room to double the group’s Pengerang storage capacity with a remaining 500-acre zone comprising of reclaimable land and adjoining buffer zones.

• We believe Dialog is undervalued as it currently trades at FY24F PE of 17x, well below its 10-year mean of 25x. This is unjustified given its long-term recurring cash flow-generating businesses which are further underpinned by the potential expansion in Pengerang developments and low net gearing levels.

Source: AmInvest Research - 20 Feb 2024