Investment Highlights

• We maintain BUY on Dialog Group with a lowered sum-of-partsbased (SOP) fair value of RM3.66/share (from an earlier RM3.75/share), which reflects a neutral ESG rating of 3 stars. This also implies a CY23F PE of 32x, near its 5-year average of 31x.

• We reduce FY22F–FY24F earnings by 5%–10% largely due to higher project cost assumptions as Dialog’s 9MFY22 core net profit of RM390mil (-1% YoY) came in below expectations, accounting for 65% of our FY22F earnings and 69% of street’s. As a comparison, 9M accounted for 70%–76% of annual net profits over the past 3 years. Nevertheless, the group declared a slightly higher interim dividend of 1.3 sen (+0.1 sen YoY).

• Dialog’s 3QFY22 net profit rose 4% QoQ to RM133mil from a 9% revenue increase to RM593mil as project execution improved slightly amid the relaxation of movement restrictions. This was partly offset by a 19% QoQ reduction in associate contribution to RM55mil on lower tank storage and utilisation rates given oil futures price backwardation currently and dwindling global supplies.

• However, 3QFY22 EBITDA margin rose slightly by 1% point to 24.7% on slightly improved project costs, which remain pressured by high raw material/logistics costs driven by global supply chain disruptions.

• While most of the group’s 9MFY22 pretax of RM424mil (-4% YoY) stemmed from Malaysia, the domestic share slid 2% points YoY to 92% with the Middle East rising to 7% from 3% previously from heightened regional oil & gas activities at the Jubail supply base in Saudi Arabia.

• Looking forward, the group is endeavouring to recover the additional costs caused by Covid-19-related restrictions from clients together with higher raw material costs. Nevertheless, we have adopted more conservative margin assumptions given that past cost-compensation negotiations with clients are likely to be protracted. Even so, we are confident that Dialog, which has demonstrated savvy prudence during the pandemic, can safely navigate the current inflationary regime with further relaxation in foreign labour constraints.

• We expect the group’s 4QFY22 earnings delivery to remain steady given 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 against the backdrop of rising global economic activities. Longer term, 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 CY23F PE of 20x, well below its 5-year mean of 31x. 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 - 18 May 2022