Stripping off exceptional item of RM11.5m, Dialog reported 4QFY23 core net profit of RM115.3m, dipping by -2.2% YoY and -12.8% QoQ, attributed to weakness in all three segments. The Group’s downstream and midstream segments were dragged by cost overrun and financing cost respectively. Meanwhile, its upstream segment was impacted by higher maintenance activities and operating cost. All in, the Group reported a flattish FY23 core net profit of RM506m (+0.8% YoY), spot-on with our estimates at 100.3%, though lagging consensus estimates at 96.6%. Although its midstream segment will remain stable over the longer term with new capacity expansion in the future, we believe the Group is likely to continue facing headwinds in the near term due to elevated financing cost, and slower downstream activities. On this basis, we cut our FY24-25 earnings forecast by 5%-6% and downgrade our call to Neutral (from Outperform) with lower TP of RM2.40 (from RM2.65). A final dividend 2.40sen was proposed bring in a total dividend for FY23 was 3.70sen.

• Deteriorating margins in midstream segment. Since 2QFY23, the utilisation rate for independent terminal storage has been sustained at above 90% with the rate stable at around SGD6/cbm, with no significant upward revision on the rate. However, the Group’s cost of borrowing which is largely denominated in SGD has been increasing in tandem with global elevated interest rate environment. We reckon high financing cost causing lower net margins will remain for a while. However, this could be mitigated by future income stream from the 24,000 cbm Dialog Tanjung Langsat (DTL) Terminal capacity expansion, scheduled for completion by 4Q 2024.

• Headwinds in downstream segment. Cost overruns for legacy projects remains a drag in the Group’s downstream segment. This is expected to continue until a majority of the projects are completed by end 2QFY24, upon which the Group is likely to see weaker downstream activities. Based on our checks, the mega turnaround for Pengerang Integrated Complex (PIC) plants is expected to be delayed to 2025 instead of our earlier expectation of 2024. Although we believe the Group could potentially secure a large share of the project due to its strong presence in Pengerang, the delay is largely negative especially if the tender is only to be finalised latest by 2H 2024.

Source: PublicInvest Research - 16 Aug 2023