Investment Highlights

• We maintain BUY on Dialog with a higher sum-of-parts bas fair value (FV) of RM2.95/share (from RM2.91/share previousl which implies a 1-year forward PE of 27x, broadly on par w its 10-year average of 25x . Our fair value reflects neutral 3-star ESG rating .

• Our higher FV is due to stronger contribution from the group downstream segment. Similarly, we raise earnings by 2%-6 for FY24F-FY25F to account for the following:
  
  ➢ Elevated storage rates of SG$6-6.50 per cubic meter (cb (vs. S$5.50-$6 per cbm previously) throughout the peri for the independent tank terminal business;
  
  ➢ Flattish earnings contribution from the Jubail Offsho Supply Base; and
  
  ➢ Increasing EBITDA margins by 0.5%-1.5% pts to 18 19.5% for stronger contribution from the group’s recen renewed plant maintenance contracts.

• After falling to a 1-year low of RM1.76/share, following Dialog’s exclusion from the FTSE Bursa Malaysia KLCI index at the end of last year, the share price has seen a strong recovery of 34%.

• Dialog’s valuation has remained steady in recent months a 1-year forward PE of 21x-23x, which is a premium to select O&G large-cap average of 18x . Given the group resilient earnings profile and strong balance sheet among peers, we believe the differential is due to Dialog’s significa upside in the medium term (3 to 5-years).

• We see the group as a beneficiary of the Johor theme pl following the state government’s proposal to inclu Pengerang within the Johor-Singapore Special Economic Zo (JS-SEZ). The inclusion is expected to confer tax breaks a long-term financial incentives crucial to final investme decisions (FID) for investors, in our view.

• We gather from management that discussions with prospecti clients for its tank terminal business are still ongoing. Recent Singapore’s ChemOne Group announced that it is aiming the start-up of its planned US$5bil Pengerang Energy Compl by end-2027.

• Additionally, we remain hopeful over developments fro Rhongsheng Petrochemical’s planned RM80bil facility, large due to its existing relationships with Pengerang Integrat Complex’s joint-venture partner Saudi Aramco in other regio despite the lack of formal progress.

• Pre-development study for the Baram Junior Cluster is progressing well and management expects to submit a field development and abandonment plan (FDP) by end-2024. This will be followed by a 2-year development period before the field is operational and contributes to earnings, likely by FY27. Recall that the field is under a 14-year production sharing contract (PSC) in a 70:30 venture with Petros.

• We believe downstream earnings bottomed out in 2QCY24 following the renewal of its plant maintenance contracts and completion of its legacy engineering, procurement, construction and commissioning (EPCC) jobs. Early in the year, we gather that the ratio of internal-to-external contracts comprised 50:50 of Dialog’s downstream orderbook. For reference, 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.

• We expect to see sequential improvement in absolute dividend per share (DPS) moving forward. We observe stronger calls for returns by minority shareholders in recent quarters. The group recently distributed a DPS of 1.5 sen (+15% YoY) in 3QFY24. We forecast a full-year DPS of 3.9 sen for FY24F, which translates to a yield of 1.6%.

• We continue to advocate the stock as an undervalued asset play, currently trading at a FY25PE of 22x vs. its 10- year average of 25x.

Source: AmInvest Research - 16 Jul 2024