Dialog recorded 2QFY23 core net profit of RM128.8m, which is flat on both QoQ and YoY basis. This is despite higher revenue growth of +12.0% QoQ and +46.4% YoY to RM767.0m mainly contributed by the Group’s Malaysian downstream segment. Although the segment remained busy with various on going projects, it also faced multiple challenges arising from the Ukraine war, inflationary pressures, and manpower constraints, translating into cost overruns and some project losses. Margins were subsequently dragged margin by -2.0ppts and -7.5ppts, QoQ and YoY respectively. Nevertheless, the Group’s 1HFY23 core net profit is broadly in-line with our FY23 estimates at 45.5% though slightly lagging consensus at 44.3%. While the challenges are expected to remain in the near term, we are upbeat on the Group’s long term outlook as all 3 of the Group’s segments are set to grow in both recurring and project based income, including the recently-unveiled Dialog Terminal Langsat 3 (DTL3) expansion of 24,000cbm storage facility for sustainable and renewable fuel products. We maintain our Outperform call and TP RM2.95.

• Results highlight. Growth in core net profit for the quarter was flat on a QoQ and YoY basis despite it recording higher revenue growth of +12.0% QoQ and +46.4% YoY on the back of higher activities in the downstream segment (engineering, construction, and plant maintenance). This due to the continuous challenges faced by the Group, i.e., COVID-19 pandemic impacts, conflict in Ukraine, inflationary pressure, and manpower constraints, which caused severe supply chain disruption, higher material price and labour cost. Cost overruns and losses from some projects were a drag on its margins, by -2.0ppts and -7.5ppts QoQ and YoY respectively.

• DTL3 expansion. Dialog also unveiled its first foray into storage facilities for sustainable and renewable fuel products yesterday, with a storage capacity of 24,000cbm for its DTL3. The new facilities will be connected to truck loading bays and existing marine facilities. The engineering and construction of the expansion will commence immediately and is expected to be completed in Q4 2024. Currently, DTL has storage capacity of 855,000cbm. The expansion translates into an additional 2.8% to its existing capacity.

• Focus on long term. We are upbeat on the Group’s long-term outlook across all its 3 segments. Pengerang Deepwater Terminal and DTL3 will be the next growth engine for its recurring midstream segment. Meanwhile, the recent Baram Junior Cluster SFA PSC would boost its upstream producing assets if it is proven commercially viable. As for the downstream segment, we believe the Group is the frontrunner for the upcoming mega plant turnaround in Pengerang Integrated Complex in 2024 due to its strong presence in Pengerang and familiarity of the complex.

Source: PublicInvest Research - 17 Feb 2023