Dialog reported a flattish 3QFY23 core net profit of RM132.3m, +1.4% YoY, despite its revenue growing by +35.3% YoY to RM802.8m. Cumulatively, the Group reported a marginal YTD core net profit growth of 1.7% to RM390.7m, lagging our and consensus estimates at 68.2% and 70.2% of full-year numbers respectively. The persistency of tough operating environment arising from supply chain disruptions, inflationary pressures, and manpower constraintsremains the drag on its margins. This is despite the Group experiencing anincrease in business activities in all three segments. While the Group’s long-term outlook remains solid on the back of recurring income from its core  midstream segment, we cut our FY23-25 earnings forecast by an average of 10.5% as we expect the cost overruns for the downstream segment topersist for longer than initially thought. We maintain our Outperform call though with a revised TP of RM2.65 (from TP of RM2.95). An interim dividend of 1.3sen per share has been declared for this quarter.

• Dragged by cost overruns and finance cost. Core net profit for the  quarter improved marginally to RM132.3m (+1.4% YoY and +2.7% QoQ),  despite it reporting a record revenue for the quarter of RM802.8m (+35.3%  YoY, +0.7% QoQ). While the higher revenue was led by the domestic  operations, tough operating environment arising from supply chain  disruptions, inflationary pressures, and manpower constraints remains the  drag on its performance. Adding to this, the higher financing cost (+196.6% YoY, +17.2% QoQ), which is mainly from the midstream terminal business contributed to lower profit to the Group.

• Cushioned by JV and associates’ contribution. The margin  compression was cushioned by JV and associate contributions, higher by  +82.0% YoY. This is mainly due to contribution from the Group’s new  upstream assets, L53/48 onshore oilfield in Thailand after it took over the  50.01% stake acquisition in August 2022.

• Setback in the short-term, but solid over the long term. We are taking  a conservative approach in cutting our estimates after considering the  persistency of cost overruns on its downstream segments, and elevated  interest rate environment. However, we remain positive on the Group’s long-term outlook across all 3 segments especially on its core recurring  midstream terminal business. At the moment, the independent terminal  storage utilisation rate is sustained at above 90% with the rate stable  around c.SGD6/cbm. As part of its structural long-term growth, the Group  has launched its first foray into storage facilities for sustainable and  renewable fuel products with a storage capacity of 24,000cbm for its DTL3,  expected to be completed in 4Q 2024.

Source: PublicInvest Research - 19 May 2023