Investment Highlights

• We maintain BUY on Dialog Group with an unchanged sum-ofparts-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.

• We maintain our forecasts as Dialog’s 1QFY22 net profit of RM129mil (+1% QoQ) came within expectations, accounting for 21% of our FY22F earnings and 22% of street’s. As a comparison, 1Q accounted for 21%-23% of annual net profits over the past 3 years as 2H tends to be stronger. No interim dividend was declared, as expected.

• Nevertheless, the group’s 1QFY22 net profit slid 4% YoY as it continued to be weighed down by higher project costs, principally raw material/logistics costs driven by global supply chain disruptions and labour constraints from the imposition of various Covid-19-related movement control orders (MCO), translating to a 10%-point YoY drop in EBITDA margin to 26%.

• The impact of higher raw material costs is highlighted by the Malaysian operation’s 17% YoY drop in 1QFY22 pretax profit to RM125mil despite almost doubling revenue from new orders.

• The Australia/New Zealand (ANZ) segment suffered the worst, reversing to a loss of RM1mil from a profit of RM6mil in 4QFY21 mainly due to Covid-19 imposed lockdowns.

• However, a bright spot came from the Middle-East region in which the group has a 60%-equity stake in the Jubail supply base in Saudi Arabia as high oil prices have substantially escalated shipping and oil & gas activities. This drove the Middle-East’s pretax contribution by 28% QoQ to RM13mil in tandem with a 23% revenue increase.

• Looking forward, the group is endeavouring to recover the additional costs caused by the Covid 19-related restrictions from clients together with higher raw material costs. We are confident that the group, which has demonstrated savvy prudence during the pandemic, can safely navigate the current inflationary regime as movement restrictions are being gradually relaxed.

• Furthermore, 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 an attractive FY23F PE of 24x, well below its 5-year peak of 40x. We believe Dialog deserves abovepeer 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 - 17 Nov 2021