Investment Highlights

• We maintain BUY on Dialog Group with an unchanged sum-of-parts-based (SOP) fair value of RM3.31/share, which also  reflects an unchanged 3-star ESG rating. This implies a CY24F  PE of 30x, 0.25 standard deviation below its 5-year average of  31x.

• We lower FY23F/FY24F/FY25F earnings by 4%/6%/5% on lower  profit margin estimates for downstream operations as well as  higher finance cost assumptions.

• Dialog’s 9MFY23 core net profit (CNP) of RM391mil (excluding  forex gains of RM2mil and impairment loss of RM9mil) came in  below expectations at 68% of our FY23F earnings and 70% of  streets’ estimates. The group declared an interim dividend of  1.3 sen/share, which translates into a 19% payout ratio.

• YoY, 9MFY23 CNP was relatively flat despite an impressive  41% growth in revenue to RM2.3bil, dragged by persistent  margin contractions in the downstream engineering,  construction, fabrication, and plant maintenance operations as  well as higher operating expenses within upstream and  midstream segments. This more than wiped out the additional  pretax profit contribution of RM69mil from the new upstream  joint venture, Pan Orient Energy (Siam).

• The group highlighted that both upstream and midstream  operations posted lower 9MFY23 earnings YoY despite higher  revenue, weighed down mainly by higher operating expenses  and finance costs. Notably, Malaysian operation’s 9MFY23  pretax margin fell to 21% from 43% in 9MFY22 despite a 49%  revenue growth, again due to inflated project costs.

• QoQ, 3QFY23 CNP rose slightly by 3% to RM132mil  notwithstanding a flattish revenue growth of 1% to RM803mil,  supported by slightly better profit margins. On a promising  note, 3QFY23 EBITDA grew 7% QoQ due to higher  contributions from upstream and midstream segments in line  with improved revenue.

• Malaysian operations remain the largest contributor,  accounting for 69% of 9MFY23 group pretax of RM409mil (-4%  YoY), followed by Thailand (17%) and Middle East (5%).

• Meanwhile, we understand that the midstream tank terminal  segment remains resilient on the back of stable occupancy  rates of above 90% and monthly spot storage rates of above  S$6/cubic feet for its independent terminals. Additionally, we  also foresee a sequential recovery in downstream profit  margins, albeit at a slower pace on persistently higher project  costs.  

Source: AmInvest Research - 19 May 2023