Investment Highlights

• We retain BUY on Dialog with a sum-of-parts (SOP)-derived fair value (FV) of RM3.46/share . This implies a FY24F PE of 33x, a mild 6% premium against its 5-year average of 31x and reflects a neutral ESG rating of 3 stars .

• We maintain our earnings forecasts following a recent meeting with management to touch base on its latest business developments.

• The independent tank terminal business remains resilient amidst the Red Sea crisis, as the operation is a net beneficiary of oil supply uncertainties. We gather that the utilisation rate is currently at 90%-95% with monthly spot rates above S$6/m3, consistent with our expectations. For comparison, during pre-pandemic period the group saw terminal utilisation rates at lower 70%-80% levels with monthly spot rates at S$4/m3-S$5m3.

• Management is cognizant over the recent development for Maharani Energy Gateway (MEG) with the announcement of a maiden US$2bil (RM9.5bil) investment from China Engineering Corp (CEIG) for the construction of a combined- cycle gas turbine (CCGT) power plant and a green hydrogen and green ammonia plant in Muar, Johor. This is expected to complement existing plans for MEG, which comprise of: (a) oil and gas storage and blending facilities; (b) petrochemical plant and refinery; and (c) floating terminal LNG and regasification station offshore Muar, according to its proposed master plan .

• Though visibility on MEG is scant, we believe the project does not pose an immediate threat to the group’s tank terminal business in nearby Pengerang owing to its proximity to the Jurong Port in Singapore and the 55.6% composition of dedicated terminals to cater for Pengerang Integrated Petroleum Complex (PIPC) requirements.

• Dialog affirms that it is still engaged in close discussions with prospective investors for Pengerang Phase 3 expansion plans. Recall that identified investors includes Rhongsheng Petrochemical which has expressed commitment to build a RM80bil petrochemical plant within the area in April 2023. We understand from management that the remaining 300 acres of reclaimed land will be able to cater for up to 2mil m3 of storage capacity and construction works can be completed within 24 months (including the set-up of additional berths).

• For the downstream engineering, procurement, construction and commissioning (EPCC) segment, the group expects its legacy projects to end by mid-CY2024. Moving forward, we expect to see stronger margins from external contracts reflecting higher material and labour cost environment.

• The ratio of internal-to-external contracts comprise 50:50 of Dialog’s downstream orderbook currently. For reference, current internal contracts consist of the construction of the 24k m3 tank terminal facility in Tanjung Langsat, 12k metric tonnes per annum (mtpa) Maleic Acid plant in Gebeng, Pahang and the Morimatsu fabrication yard in Pengerang.

• Dialog currently trades at an attractive FY24F PE of 17.4x, 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 potentially substantive expansions in Pengerang petrochemical and storage developments with a strong balance sheet that has low net gearing levels.

Source: AmInvest Research - 9 Feb 2024