Dialog’s reported 1QFY24 core net profit grew by 19.5% YoY and 6.3% QoQ to RM137.8m, mainly driven by its international operations from the midstream Jubail Supply Base business and downstream business in Singapore and New Zealand. In Malaysia, higher production at the upstream segment mitigated lower net profit from the downstream and midstream businesses as both segments were dragged by cost overruns and financing cost respectively. Overall, Group core net profit is broadly in-line with our and consensus estimates at 28% and 26% of full-year numbers respectively. We expect cost overruns from its legacy contracts will be mitigated by its upstream segment given higher production from completed drilling programmes for its PSC field for FY24F. However, for the longer term, the Group is aggressively investing into businesses with recurring income to reduce the volatility from EPCC contracts. We retain our Neutral call and maintain TP of RM2.40 on the back of stable and diverse income across of all segments.

• The Group’s revenue rose by 9.7% YoY and 13.1% QoQ due to increase of activities at Jubail Supply Base and the engineering, construction, fabrication and plant maintenance activities in Singapore and New Zealand, on the back of improved business environment. Revenue from the Malaysia operations dipped slightly by 4% YoY due to the tail-end of its legacy contracts.

• Revenue from midstream segment remains stable as utilisation rate for independent tank sustained at above 90% with storage rates remaining above SGD6 per m3 per month. Nevertheless, profit contributions were lower due to higher financing cost.

• Upstream segment to mitigate losses from downstream segment in near term. We expect cost overruns from its legacy projects to remain a drag on its local downstream segment for the next 1-2 quarters. However, this would be mitigated by higher productions for its upstream segment after it completed drilling programs for its PSC field i.e Bayan and D35/D21/J4 fields.

• Diversification to provide stable recurring income in longer term. In September 2023, the Group announced its first foray into specialty chemical, malic acid located at BASF PETRONAS Chemical Complex in Gebeng with investments worth USD80m (approximately RM376m). In November 2023, the Group via its 49%-owned joint venture, Morimatsu Dialog announced that it is expanding its fabrication facilities in Pengerang with investment value of RM250m to manufacture equipment and modules, mainly are used to produce raw materials for EV batteries, semiconductors, and green energy. We are positive with its strategy to diversify its downstream income base towards more stable recurring income to mitigate the volatility from EPCC-based contracts. However, we expect the investments would contribute to its bottomline, earliest only in FY2026F.

Source: PublicInvest Research - 15 Nov 2023