Investment Highlights

• We retain our BUY on Dialog with a higher sum-of-parts (SOP) based fair value of RM3.36/share (from RM3.31/share previously) to incorporate contributions from a new specialty chemical plant. This implies a CY24F PE of 5x, below its 5-year average of 31x. Our fair value reflects a neutral ESG rating of 3.38-star.

• Assuming a project IRR of 12%, a 70:30 debt-to-equity ratio and a WACC of 6.2%, we estimate the malic acid project will generate an incremental SOP of 1.2% to its current SOP value of RM19bil.

• Dialog announced its maiden foray into the specialty chemicals market by investing US$80mil into a malic acid plant with a capacity of 12k metric tonne annually. It will be situated in the Integrated Chemical Site in Gebeng, Kuantan, Pahang, which is currently operated by BASF PETRONAS Chemicals. The project is expected to be completed by 2Q2026.

• Malic acid is a specialty chemical that is mainly used as a food additive in the food and beverage industry. Hence, off-takers for the product will comprise primarily of players within the F&B industry and food ingredient distributors.

• We have been made to understand that Dialog has started discussions and engagements are currently underway with potential distributors.

• As for feedstock supply, Dialog did not indicate a supply agreement in place. However, the malic acid plant is strategically located near to feedstock sources within the Integrated Chemical Site. We estimate the Dialog’s end-FY26F net gearing will rise to 13% from 7% currently.

• We are positive on this development which allows Dialog to diversify its earnings further downstream and cushion its upstream earnings from cyclical commodity prices.

• Dialog currently trades at an attractive CY24F PE of 20x, well below its 5-year mean of 31x. We believe Dialog deserves abovepeer premium valuations given its long-term recurring cash flowgenerating businesses which are further underpinned by the Pengerang development’s multi-year value re-rating bonanza and low net gearing levels.

Source: AmInvest Research - 27 Sept 2023