Investment Highlights

• We maintain BUY on Dialog Group with a lower sum-of-parts based (SOP) fair value of RM3.38/share (from RM3.58/share), which reflects an unchanged 3-star ESG rating. This implies a CY23F PE of 29x, 6% lower than its 5-year average of 31x.

• We trim FY23F-FY24F earnings by 2%-4% after lowering profit margin assumptions for downstream operations which have been impacted by increased construction material and logistics costs due to persistent global supply chain disruptions.

• Dialog’s 1QFY23 core net profit (CNP) of RM130mil (excluding forex gains of RM3mil and impairment loss on property, plant and equipment of RM7mil) was below expectations at 20% of our FY23F earnings and 22% of consensus’ forecasts.

• As a comparison, 1Q accounted for 23%-26% of full-year net profits over the past 3 years as 2H tends to be seasonally stronger. No interim dividend was declared, as expected.

• YoY, the group’s 1QFY23 CNP rose marginally by 1% notwithstanding a larger 41% increase in revenue to RM712mil, mainly dragged by persistent margin contractions in downstream engineering, construction, fabrication, and plant maintenance operations. This came about despite fresh earnings contributions totaling RM25mil from 50%-owned joint venture company, Pan Orient Energy (Siam) [POES], the concessionaire and operator of Concession L53/48 onshore Thailand.

• QoQ, the 1QFY23 CNP surged by 10% together with a revenue growth of 5%, largely supported by the maiden earnings from POES. Notably, we continue to see a challenging environment in the downstream business, which led to an 11%-point decline within the Malaysia operation’s pretax profit margin to 22% (from 33% in 4QFY22), despite a 10% increase in revenue on improved project executions.

• The significantly lower pretax profit from Middle Eastern operation, which barely broke even (from RM10mil in 4QFY22), has also contributed to the QoQ earnings weakness. This is likely due to heightened operating costs, which led to an 11%-point QoQ decrease in the segment’s pretax profit margin to 1% (from 12% in 4QFY22).

• Malaysian operations remain the largest contributor, accounting for 71% of 1QFY23 group pretax of RM127mil (- 11% YoY), followed by Thailand (20%) and other Asian countries (5%).

• Over the near term, we still foresee a sequential recovery in downstream operation’s profit margins, albeit with a slower pace on persistently higher project costs. Meanwhile, earnings from the midstream tank terminal segment should remain stable on resilient occupancy rates and monthly spot storage rates while upstream will continue to benefit from elevated oil prices of above US$90/barrel.

•  Over the 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 18x, 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 - 16 Nov 2022