Investment Highlights

• We maintain BUY on Dialog Group with an unchanged sumof-parts-based (SOP) fair value of RM3.75/share, which reflects a neutral ESG rating of 3 stars. This also implies a FY23F PE of 32x – near its 5-year average of 31x.

• Our forecasts are maintained notwithstanding the recently announced Prosperity Tax (Cukai Makmur) which could have a significant impact on companies generating taxable profit above RM100mil.

• While projecting Dialog’s FY22F pretax profit at RM634mil, we understand that the taxable income of the group’s subsidiaries are individually below RM100mil.

• Although some of Dialog’s JVs generate profit above RM100mil, they involve high capital investments which can be used as initial and annual allowances to minimise tax exposure. Hence, Dialog’s FY21 effective tax rate was only 13.5% for the group and 12.7% for the JVs.

• Separately, Dialog has secured a RM248mil engineering, procurement, construction and commissioning (EPCC) job to construct interconnecting & utilities line and a new effluent treatment plant for Pengerang Integrated Complex’s Titanium Nitrile Butadiene Latex Outside Battery Limit.

• As the project will be carried out over 16-18 months from now until 2Q2023, we believe our forecasts remain intact given our FY22F-FY23F order book assumptions of RM100milRM200mil for the EPCC segment.

• Since the job was secured via a competitive bidding process, this could mean EPCC pretax margins in the low-teens range. Nevertheless, we expect this project to support the group’s overall FY22F-FY24F pretax profit growth of 7%-11%.

• Notwithstanding a weak pandemic-impacted 4QFY21 earnings performance (-19% YoY), we remain positive on the long-term prospects of the group given that the full-year contribution of Dialog Pengerang Phase 5’s 430k cubic metre (m3) capacity together with Tanjung Langsat 3 terminal's additional 85k m3 capacity by the end of 2021 are expected 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 an attractive FY23F PE of 25x, well below its 5-year peak of 40x. 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 - 5 Nov 2021