Investment Highlights

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

• Pending the upcoming results on 17 May, we maintain our forecasts for now. Meanwhile, our recent virtual meeting with management provided the following salient highlights:

• The group minimally sources raw materials and parts from Shanghai, which is currently undergoing a strict Omicronspurred lockdown under China’s zero-Covid directive. Management is also sourcing from other countries to mitigate risks of disruption from any country.

• While Dialog still experiences supply chain disruptions that were initially caused by the pandemic, the group has secured materials, parts and equipment upon securing current contracts. Hence, management views that the inflationary impact from supply disruptions has already been largely cushioned by the group’s procurement strategies that have been proven over the years.
  • The group has been sourcing for local talent ever since the Covid lockdowns in March 2020 restricted access to foreign labour. In Singapore, Dialog works closely with clients and partners to mitigate labour constraints via permit and visa approvals for plant maintenance jobs. In the Middle Eastern and Australia/New Zealand regions, operations are returning to pre-Covid levels.
  • We continue to expect the restoration of international travel and easing of movement restrictions to translate to a stronger 2HFY22. In 2QFY22, Dialog’s Malaysian pretax margin improved 3% points QoQ to 47%, inferring that the group is already in the process of mitigating its operational costs.
  • Management reaffirmed that Dialog did not incur any late delivery charges on any projects during the 2020–2021 lockdowns. The group is still in discussions with clients on recovering some of the Covid-19-related costs incurred in FY21 and 1HFY22, which may include incorporating these into the future billings of long-term contracts.
  • Upstream operations, which accounted for 20% of group 1H2022 pretax profit, registered a strong performance given elevated crude oil prices. Recall that Dialog wholly owns Petronas Carigali’s Bayan oilfield service contract which enhances recoverable reserves through production enhancement activities. The company also has a 20% stake in a production-sharing contract from a farm-out from ROC Oil for the D35/ J4/ D21 PSC fields, off Sarawak.
  • The Middle East, which accounted for 8% of 1HFY22 pretax profit, is expected to be supported by high supply base activities at Jubail against the backdrop of favourable crude oil prices.
  • For engineering, procurement, construction, installation and commissioning works, Dialog secured RM1.1bil contracts from Petronas’ subsidiaries last year, which will contribute to the group’s earnings growth for FY22F–FY24F. Recall these are the gas compression/debottlenecking job in Kluang, Johor for Petronas Gas and utilities line/effluent plant for the Pengerang Integrated Complex. We understand the group will be selective in fresh bids as management’s focus will be on executing and delivering these existing contracts as scheduled.
  • The group’s midstream segment, comprising tank terminal operations, accounted for half of 1H2022 pretax profit. We expect this segment to support the group’s earnings trajectory even though spot rates have eased slightly from the beginning of the year to S$5/m3 with utilisation rates for the group’s independent terminals in Pengerang Phase 1 and Tanjung Langsat declining to a still comfortable 80% from 100% during the pandemic-driven 2020 glut. These independent terminals account for half of Dialog’s 5.1mil m3 capacity currently.
  • Together with the adjoining buffer land surrounding Pengerang Phase 3, Dialog still has 500 acres of land which have multi-year development potential, including downstream specialty chemical production in which the group is already discussing with interested multinationals. Besides tank storage projects, the group is exploring renewable energy solutions such as hydrogen, solar and carbon capture storage as part of its ESG commitments with a keen focus on value accretive propositions.
• Dialog currently trades at an attractive FY23F PE of 22x, 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 - 26 Apr 2022