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.

• We have marginally adjusted our forecasts as Dialog’s 1HFY22 core net profit of RM257mil (flat QoQ) came in largely within expectations, accounting for 43% of our FY22F earnings and 44% of street’s. As a comparison, 1H accounted for 43%–49% of annual net profits over the past 3 years as 2H tends to be stronger. No interim dividend was declared as expected.

• Dialog’s 2QFY22 net profit rose 5% YoY from a 56% revenue surge as the relaxation of movement restrictions allowed higher job execution, together with the commencement of the 430K cubic metre tank capacity from Pengerang Phase 5 terminal for BP Singapore in February 2021.

• However, 2QFY22 EBITDA margin halved YoY to 24% from higher project costs, principally raw material/logistics costs driven by global supply chain disruptions and labour constraints from the imposition of various movement control orders (MCO). The impact of higher raw material costs appears to be stabilising as the Malaysian operation’s 2QFY22 pre-tax margin improved by 3% points to 47%, partly supported by a slight 3% revenue growth.

• The Middle East region’s 2QFY22 pre-tax profit dropped 13% QoQ to RM11mil from higher costs of operations despite a strong revenue growth of 35%. Even so, the Australia/New Zealand (ANZ) segment has turned around to a net profit of RM5mil in 2QFY22 from a slight loss in 1QFY22 from lower operating costs.

• 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 Dialog, which has demonstrated savvy prudence during the pandemic, can safely navigate the current inflationary regime as movement restrictions are further 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 2HFY22F 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 - 16 Feb 2022