Investment Highlights

• We retain BUY on Dialog with a sum-of-parts (SOP) with a higher fair value of RM3.46/share (from RM3.36) after rolling forward our valuation period to FY24 (Exhibit 2). This implies a FY24F PE of 33x, a 6% premium against its 5-year average of 31x and reflects a neutral ESG rating of 3-star.

• We maintain our FY24F-FY26F earnings as the group’s 1Q FY24 results were within expectations. Dialog’s 1QFY24 core net profit (CNP) of RM137.9mil (excluding forex gains of RM2.0mil and fair value losses from other investments of RM7.7mil) came in within expectations at 23.3% of our FY24F earnings and 23.7% of consensus’ forecasts.

• As a comparison, 1Q earnings 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 1QFY24 revenue rose 9.7% driven primarily by international operations which saw increased activities for its (i) Jubail Supply Base in Saudi Arabia and (ii) downstream engineering, construction, fabrication and plant maintenance in Singapore and New Zealand. However, CNP rose by a smaller 6.2%, partly negated by increased depreciation and tax expenses.

• Notably, we observe that share of results from joint ventures and associates rose 11.7% due to increased contribution from terminal operations from higher tank storage occupancy rates. We gathered that the utilisation rate for the group’s independent terminal’s storage tanks was sustained at 90% during the period, and this was significantly higher than the historical average of 70% to 80%. Additionally, the tank storage rates have held up above SG$6 per cubic meter (cbm).

• Sequentially on a QoQ basis, 1QFY24 CNP surged by 19% together with a revenue growth of 13%, largely supported by the group’s improved Malaysian operations performance, particularly for the upstream segment which saw higher production from both the Bayan and D35/D21/J4 fields. 1QFY24 saw an improved economies of scale evidenced by a 7.3%-rise in profit before tax (PBT) margin for the region to 26.4%. This had offset the weaker downstream segment which continued to be weighed down by project cost overruns due to global supply chain disruptions and the challenging operating environment.

• Malaysian operations remain the largest contributor, accounting for 68% of 1QFY24 group PBT of RM153.2mil (+20% YoY), followed by the Middle East (14%), Thailand (12%) and Australia and New Zealand (8%).

• Over the near term, we continue to see a sequential recovery in downstream operation’s profit margins, albeit at a slower pace due to the persistently high project costs. Meanwhile, earnings from the midstream tank terminal segment should remain stable amidst resilient occupancy rates and monthly spot storage rates while upstream segment will continue to benefit from elevated oil prices of above US$85/barrel.

• Over the longer term, there remains ample room to double the group’s Pengerang storage capacity with a remaining 500-acre zone comprising of reclaimable land and the adjoining buffer zones.

• Dialog currently trades at an attractive FY24F PE of 20x, well below its 5-year mean of 31x. We believe Dialog deserves a premium valuation above peers given its long-term recurring cash flow-generating businesses which are further underpinned by the potential expansion in Pengerang and low net gearing levels.

Source: AmInvest Research - 15 Nov 2023