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 an FY23F PE of 32x – near its 5-year average of 31x.

• Dialog has secured an engineering, procurement, construction and commissioning (EPCC) contract worth up to RM360mil for Petronas Gas’ (PetGas) new booster compressor station with associated equipment and facilities in Mengkibol, Kluang, Johor which will commence this month with completion by 1Q2024.

• Part of PetGas’ southern transmission improvement & readiness project at Kluang, Johor, the scope also includes some modification scope for existing compressors at the Segamat compressor station.

• This comes hot on the heels of PetGas reaching final investment decision last week to build the compressor station with a total investment cost of RM460mil, which essentially involves a debottlenecking project aimed at increasing its Peninsular Gas Utilisation network’s capacity in the southern region amid rising demand prospects.

• We are positive on this fresh earnings-enhancing job as Dialog has been more active in bidding for external projects. Last month, Dialog clinched a RM248mil EPCC job to build interconnecting utilities line and a new effluent treatment plant for the titanium nitrile butadiene latex facility at the Pengerang Integrated Complex.

• However, we maintain our forecasts which already incorporate EPCC billings of RM100mil for FY22F and RM200mil for FY23F–FY24F. Given that these recent external jobs were secured via competitive tenders, we expect lower margins compared to past projects undertaken for Pengerang Phases 1 and 2 in which Dialog has associated stakes involving profitsharing arrangements.

• 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 labour constraints and inflationary regime as movement restrictions are 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 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 - 16 Dec 2021