• Keep BUY, new TP MYR2.86 from MYR2.98 TP, 30% upside with c.2% FY24F (Jun) yield. Dialog’s 9MFY23 results missed expectations due to its slower-than-expected margin recovery. However, we still expect margins to recover gradually, and deliver 4-8% YoY earnings growth in FY23F-25F. Its current valuation of 24x FY24F P/E is still below the 5-year mean of 28x.

• Results below expectations. At 69% and 70% of our and Street full-year estimates, 9MFY23 core earnings of MYR391m (+1% YoY) came in below expectations, no thanks to the company’s weaker-than-expected margins. A first interim DPS of 1.3sen was declared.

• 3QFY23 core earnings rose by 3% QoQ to MYR132m, thanks to a slightly better adjusted EBITDA margin of 14% (2QFY23: 13%) amidst a flattish topline (+1% QoQ) and higher JV & associate contributions (+3% QoQ, better Pengerang independent storage terminal contribution and Pan Orient Energy Corp numbers). Cumulatively, 9MFY23 core earnings inched up 1% YoY to MYR391m on the back of higher international operations’ profit offsetting lower domestic operational profit and higher finance costs.

• Outlook. We believe downstream activities will remain robust – led by stronger numbers from engineering, construction and plant maintenance, as well as an improved outlook for fabrication and specialty products. However, cost challenges and margin pressure are likely to persist in the near term, evidenced by unexciting EBITDA margins in the past few quarters. Meanwhile, there have been news of potential developments in Pengerang: i) Committed investments for Phase 2 of the Pengerang Integrated Petroleum Complex (PIPC) amounting to MYR5bn; ii) China’s largest petrochemical company Rongsheng Petrochemical expressing its interest in investing in Pengerang; as well as iii) ChemOne Group looking to achieve financial close for its USD4.5bn Pengerang Energy Complex in 2H23. Dialog, in our view, should continue to be one of the key beneficiaries due to its exposure in EPCC, tank terminal business, EPCC and maintenance services in Pengerang.

• We cut our FY23-25F earnings by 5-8% after imputing lower margins for both upstream and downstream divisions. We pare down our TP to MYR2.86 after rolling forward our valuation base year to FY24, slashing earnings estimates and incorporating a 4% ESG discount, based on a revised ESG score of 2.8. Downside risks: Weaker tank terminal rates, and slower-than-expected expansion of Pengerang Phase 3.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 19 May 2023