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

• Dialog’s 30%-owned joint-venture with Technip Energies Sdn Bhd has secured an engineering, procurement, construction and commissioning (EPCC) job worth up to RM724mil via a bidding exercise for Petronas Chemicals Group’s (PChem) new single-train melamine plant in Kedah. The contract includes modification to existing plant and utilities will commence this month with completion by 2H2024.

• This is the third substantive contract which Dialog has secured over 4 months from Petronas’ group of companies. Recall that Dialog secured a RM248mil job to build Petronas Refinery and Petrochemical Corp’s interconnecting utilities line and a new effluent treatment plant for the titanium nitrile butadiene latex facility at Pengerang Integrated Complex in November 2021, and another RM360mil contract for Petronas Gas’ new booster compressor station in Mengkibol, Kluang, Johor in December last year.

• Assuming that Dialog’s construction and pre-commissioning scope of activities could reach 30% of PChem’s contract value and a competitive pre-tax margin of 10%, we estimate that this job will add a marginal 1% to FY23F earnings.

• Pending the release of 2QFY22 results later this week, we maintain our forecasts which have incorporated EPCC billings of RM100mil for FY22F and RM200mil for FY23F–FY24F.

• As 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 profit-sharing arrangements.

• Going forward, we expect additional contracts to be awarded from Petronas as Dialog has a 5-year master service agreement with Petronas for plant maintenance and turnaround works in 2019 with optional extensions.

• 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 is 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 23x, 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 - 14 Feb 2022