Investment Highlights

• We maintain BUY on Dialog Group with an unchanged sumof-parts based (SOP) fair value of RM3.66/share, which reflects an unchanged ESG rating of 3 stars. This also implies a CY23F PE of 32x, near its 5-year average of 31x.

• We maintain our earnings forecast pending the upcoming FY22 results on 18 August. Meanwhile, we recently held a virtual engagement session with management and these are the key takeaways:
  • While the outlook remains challenging for Dialog’s downstream operations amid an inflationary environment caused by supply chain disruptions, the group does not expect further profit margin contractions as it has factored in higher raw material costs into existing secured contracts. Furtzhermore, the recent pullbacks in commodity prices (mainly steel, which is down by 10% since end-May 2022) would help improve profit margins in the coming quarters, easing clients’ cost concerns and repricing new contracts.
  • On the other hand, the company views the lingering manpower constraints to be the key hurdle preventing it from taking on more projects. Hence the group will prioritise the delivery of ongoing jobs while taking a prudent stance in replenishing its order book.
  • The group’s midstream tank terminal operations, which accounted for 45–50% of 9MFY22 earnings, continue to be resilient, backed by sustainable utilisation and spot storage rates. We gather that for its independent terminals, namely the Tanjung Langsat and Pengerang Phase 1 terminals, monthly spot storage rates are predominantly intact QoQ at S$5.00–5.50 per cubic metre while utilisation rates remain well above 80%.
  • The group’s upstream operations, which contributed more than 20% of 9MFY22 pretax profit, are anticipated to register a robust performance given elevated oil prices. Recall that Dialog wholly owns Petronas Carigali’s Bayan oilfield service contract which enhances recoverable reserves through production enhancement activities. It also has a 20% participating interest in the D35/ J4/ D21 PSC fields, off Sarawak.
  • Dialog also targets to complete the US$38.7mil (RM170mil) acquisition of Pacific Orient Energy Corp (POEC) by the end of August 2022, which implies that POEC will only start making meaningful earnings contribution from 2QFY23 onwards. Recall that Dialog had in June proposed to acquire a 100% stake in POEC which owns a 50.01% interest in Pan Orient Energy (Siam) – the operator of Concession L53/48, onshore Thailand.
  • The POEC acquisition, which could add 6% to the group’s FY24F earnings, accentuates Dialog’s long-term strategy to further diversify its operations across the oil and gas value chain and mitigate market volatilities. While the acquisition may not bode well for its ESG profile due to incremental carbon footprints from the upstream oil production, the group argues that POEC’s steady cash flows are vital in providing Dialog with the necessary funding for future sustainable ventures. Also, POEC’s concession will eventually expire in 2035, which is in line with the group’s aspirations to achieve net-zero carbon emissions by 2050.
• 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 - 4 Aug 2022