Investment Highlights

• We maintain BUY on Dialog Group with a lowered sum-of-partsbased (SOP) fair value of RM3.80/share (from RM4.15/share), which reflects a neutral 3-star ESG rating. This also implies an FY22F PE of 32x, near its 5-year average of 31x, partly based on a valuation of the 650-acre Pengerang buffer land at RM60 psf.

• We have reduced FY22F–FY23F earnings by 9–11% from a reduction in margin and revenue assumptions due to higher operating costs and delays in orders and execution from the imposition of various Covid-19-related movement control orders (MCO).

• Dialog’s FY21 core net profit of RM520mil (excluding RM17mil gain from sale of plant and machinery and RM6mil fair value gain on investments) was below our expectation but within street’s, at 7% below our forecast and 2% of consensus. It declared a final dividend of 1.9 sen (flat YoY), in line with our expectations.

• The group’s FY21 core net profit dropped by 14% YoY, worse than our earlier projected decline of 7%. This was the first earnings contraction for the group since 2007, which stemmed largely from a 30% reduction in revenue to RM1.6bil from the completion of major engineering, procurement and construction projects in Pengerang together with delays and higher-thanexpected operating costs arising from raw materials and precautions undertaken for the Covid-19 pandemic and MCO restrictions.

• Dialog’s 4QFY21 revenue rose 29% on higher technical/specialist services together with the commencement of a 430K m3 storage terminal in Pengerang Deepwater Terminal Phase 3 in March this year, which is chartered by BP Singapore. However, 4QFY21 EBITDA was flat QoQ at RM148mil due to an 8-percentage point fall in margin from higher operating costs during the MCO.

• Notwithstanding our more conservative earnings forecasts, we note the possibility of upside surprises as Dialog is endeavouring to recover the additional costs caused by the Covid 19-related restrictions from clients.

• Additionally, the full-year contribution of Dialog Pengerang Phase 5’s 430K m3 capacity together with Tanjung Langsat 3 terminal's additional 85K m3 capacity by the end of 2021 are likely to drive the group’s earnings growth trajectory in FY22F against the backdrop of rising global economic activities in tandem with rising Covid 19 vaccination rates. Thereafter, the group 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 22x, well below its 5- year peak of 40x. We believe Dialog deserves above-peer premium valuations given its long-term recurring cash flowgenerating businesses which are further underpinned by the Pengerang development’s multi-year value re-rating bonanza and low net gearing levels

Source: AmInvest Research - 20 Aug 2021