Dialog announced that its wholly-owned subsidiary, Dialog Malic Acid SB will build, own and operate a specialty chemical plant producing malic acid in Gebeng, Kuantan. The plant will be located within the integrated chemical site operated by BASF PETRONAS Chemicals SB. The investment value is about USD80m (or RM374.6m) with its production capacity approximately 12,000 metric tonnes per annum. The Group is expected to undertake the engineering, procurement, construction and commissioning (EPCC) works internally and expected to be completed in 2Q 2026. We are mildly positive on this development given that it will provide diversification and stable recurring income to its downstream segment in the longer term. Earnings from the malic acid plant could fluctuate however, similar to other petrochemical commodities. We make no changes with our numbers for now as this is still at preliminary stages. We maintain our Neutral call and TP of RM2.40.

• Malic acid is a specialty chemical that is primarily used as a food additive in the food and beverages industry, and can also be used for cosmetic and industrial applications. The main feedstock of malic acid is Maleic Anhydride (MAn), which is expected to be supplied by the upcoming Petronas Chemical Group’s (PCG) Maleic Anhydride (MAn) plant (completed in 2H 2025) within the integrated chemical site in Gebeng.

• Stable recurring income to downstream segment. Based on the guidance given, the project is expected to deliver low double digit Internal Rate of Return (IRR) and to have payback period within 10 years given the USD80m investment. The Group has a comfortable net gearing ratio of 0.1x, giving it ample room to fund the project. At the moment, discussions with the off-taker for distribution of the malic acid are still at preliminary stages.
  Cost overruns from its legacy projects in the downstream segment remains a drag on its financial performance, even after several quarters. Having this malic acid plant will provide diversification and stable recurring income as compared to the EPCC-based income in its downstream segment. However, earnings could fluctuate, similar to other petrochemical commodities in tandem with global economic cycles.

• Consistent with NIMP 2030. Overall, the investment is consistent with the government’s New Industrial Master Plan (NIMP 2023) action plan to shift from basic to specialty chemicals. This will increase the petrochemical sector value chain primarily in Gebeng, from intermediate products (Maleic Anhydride - MAn) to specialty chemical products (Malic Acid), in this case Nutrition Chemical. We expect more investments in special chemical products in the future, as encouraged by government policy.

Source: PublicInvest Research - 26 Sept 2023