Investment Highlights

• We maintain BUY on Dialog Group with a lowered sum-of-partsbased (SOP) fair value of RM4.15/share (from an earlier RM4.80/share), which reflects a neutral ESG rating of 3 stars. This also implies a CY22F PE of 33x, below its 5-year peak of 39x. This is partly based on a lowered valuation of the 650-acre Pengerang buffer land at RM60 psf from RM70 psf earlier.

• We have reduced FY21F–FY23F earnings by 5%–9% on a 5%–8% reduction in specialist/technical services/plant maintenance revenue assumptions in FY21F due to delays in orders and execution from the imposition of various Covid-19-related movement control orders (MCO).

• Dialog’s 9MFY21 core net profit of RM392mil (excluding RM12mil gain from sale of plant and machinery) (-12% YoY) was below expectations, accounting for 64% of our FY21F earnings and 68% of street’s. As a comparison, 9M accounted for 74% of net profit over the past 3 financial years. The group declared a first interim dividend of 1.2 sen (flat YoY), in line with our expectations.

• We expect a stronger 4QFY21 as Dialog will not bear the additional deferred tax provision from its JV/associates in 2Q– 3QFY21 due to capitalisation of additional Pengerang Phase 2 costs. Recall that 2QFY21 bore higher lumpy deferred tax provision of RM40mil arising from its 25%-owned Pengerang Phase 2 development.

• Operationally, Dialog’s 3QFY20 EBITDA slid 4% QoQ to RM148mil from an 8-percentage point contraction in margin from higher overhead costs during the MCO. However, 3QFY21 revenue still rose 16% QoQ on higher domestic (+24%) and Middle East (2.8x) contributions, notwithstanding movement restrictions which slightly delayed the group’s activities.

• Following our earnings revision, we now project Dialog’s FY21F net profit to decline by 7%, an unusual event for the group which has not suffered any annual earnings reduction over the past 15 years. Nevertheless, with the commencement of Dialog Pengerang Phase 5’s 430K cubic metre (m3) capacity for BP Singapore commencing March 2021 under Pengerang Phase 3, we expect the group’s core FY22F earnings trajectory to recover.

• The earnings growth will be subsequently supported by the completion of Tanjung Langsat 3 terminal's remaining 85 m3 capacity by the end of 2021, with another 100,000 m3 commencing 2022. Thereafter, Dialog still has ample acreage to double its Pengerang storage capacity with a remaining 500-acre zone comprising reclaimable land and the adjoining buffer zone.

• Dialog currently trades at a FY22F PE of 24x, well below its 5- year peak of 39x. We view its higher-than-peer premium as justified given Dialog’s long-term recurring cash flow-generating businesses, underpinned by the Pengerang development’s multi-year value re-rating bonanza and low net gearing levels.

Source: AmInvest Research - 20 May 2021