Investment Highlights

• We maintain BUY on Dialog Group with unchanged forecasts and sum-of-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.

• After earlier signing a memorandum of understanding in August this year, Dialog has now entered into a shareholder agreement 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.

• Recall that 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.

• Diyou’s founders have over 30 years of experience in recycling post-consumer 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.

• The estimate for the investment outlay has decreased by US$5mil to US$20mil. Assuming a project IRR of 10% and debt-to-equity ratio of 80:20, this will not have any significant impact to either Dialog’s SOP or FY22F earnings. However, the consolidation of debt could slightly raise the group’s low FY22F net gearing levels 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 investment into a start-up to develop proprietary carbon capture technology and continuing support for MyKasih, a programme for impoverished families and students. All in, the project reaffirms our 3-star ESG rating for the group, in line with FTSE4Good’s rating.

• Dialog currently trades at a FY23F PE of 24x, well below its 5- year peak of 39x. 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 - 12 Nov 2021