Investment Highlights

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

• Dialog has entered into a memorandum of understanding with Diyou Fibre Sdn Bhd (Diyou) to participate in a 51:49 joint venture to build, own and operate a food-grade recycled polyethylene terephthalate (PET) pellet production facility in Nilai, Negeri Sembilan.

• The plant, which could be located near Diyou’s existing factory, will use its recycled PET flakes as feedstock. Diyou, which has a production capacity of 100,000 tonnes annually, is one of the country’s largest mechanical recycling manufacturer.

• Its founders have over 30 years of experience in recycling postconsumer plastics which are made into materials used for polyester staple fibre, food and beverage packaging, industrial packing, construction, automotive and other raw materials in various industries.

• This project aims to meet rising demand from multi-national corporations for food-grade recycled PET materials against the backdrop of increasing penalties on non-recyclable plastic packaging waste in developed countries.

• In July last year, the European Union (EU) introduced the Packaging Levy while the UK will be imposing a plastic packaging tax beginning April 2022. The EU is targeting to achieve a 90% collection target by 2029 for plastic bottles, which must contain at least 30% recycled content by 2030.

• Based on the investment cost of US$25mil, project IRR of 10% and debt-to-equity ratio of 80:20, we estimate that this minor 51%- owned project, if it materialises, will not have any significant impact to either Dialog’s SOP or FY22F earnings. However, the consolidation of debt could raise the group’s low FY22F net gearing levels slightly to 20% from 18%.

• Nevertheless, we are mildly positive on this potential recycling project which supports Dialog’s environmental, sustainability and corporate governance (ESG) initiatives. These include the group’s continuing support for MyKasih, a programme for impoverished families and students, further reaffirming our 3-star ESG rating for the group.

• Dialog currently trades at a FY22F PE of 22x, well below its 5-year peak of 39x. We believe Dialog deserves above-peer premium valuations given its long-term recurring cash flow-generating businesses which are further underpinned by the Pengerang development’s multi-year value re-rating bonanza and low net gearing levels.

Source: AmInvest Research - 12 Aug 2021