■ Dialog will build, own and operate an US$80m malic acid plant based in Gebeng by 2QCY26F; this is its maiden specialty chemicals venture.

■ We expect this to be a low-risk business venture given malic acid’s use as a food additive but we also think that earnings contributions could be smallish.

■ Reiterate Add with an unchanged SOP-based TP of RM2.70.

Adding specialty chemicals to its cap

● Dialog told Bursa yesterday that it will build, own and operate its maiden specialty chemical plant producing malic acid in Gebeng, Pahang, that will open for operations in 2QCY26F. Dialog had spoken about entering the specialty chemicals arena as far back as in Jan 2019 and has finally taken the plunge in order to increase recurring earnings contributions from its downstream segments; Dialog’s recent investments have been focused on the upstream (onshore oil field acquisition in Thailand as well as signing the Baram Junior Cluster small field asset production sharing contract offshore Sarawak) and midstream (tank terminals at Langsat and Pengerang) segments. 

● Malic acid is found naturally in various fruits, although Dialog’s 12,000-tonne p.a. plant will produce malic acid via synthetic formulations for use as a food additive to add sourness and tartness to fruit juices, wines, jams and chewing gum. According to the company, the production of malic acid is attractive because, as a food additive, it may be less susceptible to cyclical dynamics and demand may be more defensive. Also, Dialog noted that there are currently no malic acid producers in the ASEAN region. One major producer of malic acid is Fuso Chemical Company (4368 JP, Not Rated), which has a life sciences division and is one of the major malic acid producers in the world. According to Bloomberg, Fuso has consistently made profits as far back as since 1999.

● Dialog’s malic acid plant project will require a capex of US$80m (RM375m), which is small, in our view, and will be funded via internal cash balances as well as the issuance of sukuk. Dialog has a RM3bn sukuk programme, of which only RM1bn has been issued.

● Dialog’s malic acid plant will be situated within the BASF Petronas Chemicals (BPC, not listed) industrial area because Petronas Chemicals Group (PCHEM MK, Reduce, share price RM7.32, target price RM6.85) will supply the maleic anhydride (MAn) feedstock; PCHEM acquired the previously-shuttered MAn plant from BPC in 2022 and will reopen it in 1HCY25F to produce high-quality MAn for the food and pharmaceutical industries. Dialog’s plant will be able to supply 10% of global demand for malic acid, we estimate. It plans to sell 10% of its malic acid output to domestic Malaysian manufacturers and 90% exported to the ASEAN region. Dialog will buy MAn feedstock as well as sell its malic acid production at market prices.

Financial impact on Dialog

● Dialog will perform the engineering, procurement, construction and commissioning (EPCC) works for the wholly owned plant over the next three years but the EPCC revenues and profits will not be recognised in its consolidated financial statements as they will be eliminated on consolidation. Dialog will likely earn revenues and profits from the plant once it is operational from 2QCY26F but we are unable to assess the financial contribution at this point. We think the earnings contributions will likely be modest given the small capex spending. Separately, Dialog will likely commission its recycled-PET plant in 1QCY24F and we also expect the earnings contribution to be minor.

● Potential rerating catalysts: 1) the likely lift in gas production from Dialog’s Bayan field as a new Mobile Offshore Production Unit (MOPU) will begin operations at the field from Jul 2023; 2) the completion of legacy third-party EPCC projects by mid-CY24F that were affected by cost inflation; 3) the renegotiation of its plant maintenance contract with Petronas once the current 5-year contract ends in mid-CY24F; and 4) potential good news from ChemOne (not listed) as it may make the final investment decision on its new Pengerang refinery in 4QCY23F, according to The Sun. Downside risks include its independent tank storage rates and utilisation potentially weakening if OPEC+ production cuts extend beyond Dec 2023F. 

Source: CGS-CIMB Research - 26 Sep 2023