• 1QFY6/24 core net profit of RM135m was in line at 24% of our FY24F; we expect 2HFY24F to be better than 1H, as legacy contracts tail off.

• Reiterate Add with higher SOP-based TP of RM2.81 as we roll forward to end-CY24F, using Ke of 8.8% on long-term tank terminal cashflows.

• The key risk is that Dialog may be removed from the FBMKLCI index in Dec 2023; any potential sell-off could open up buying opportunities, in our view.

Better Upstream and Specialist Products Performance in 1QFY24

1QFY24 (Jul-Sep 2023) core net profit of RM135m was 18% higher qoq (and 5% higher yoy) on the back of higher sales of specialist products and services to international customers, higher activity levels at the Jubail Supply Base in Saudi Arabia as a result of frenetic offshore oil and gas exploration work in the Middle East, and more EPCC and plant maintenance work in Singapore and New Zealand. Higher Brent average crude oil prices in Jul-Sep 2023 of US$87/bbl (vs. the Apr-Jun 2023 average US$78/bbl) may have also boosted the qoq performance of its two oilfields offshore Sarawak, although crude oil prices were lower than the Jul-Sep 2022 average of US$100/bbl. Dialog noted that production at its two oilfields were higher yoy in 1QFY24, which we believe was due to previous investments in production drilling, as well as the operational commencement in Jul 2023 of a new gas mobile offshore production unit (MOPU) at the Bayan field. Conversely, Dialog’s share of POES profits fell 35% qoq in 1QFY24 for undisclosed reasons.

Tank Terminals Did Better Qoq, Potentially Also for EPCC Segment

We believe Dialog’s core net profit from its tank terminals was also higher qoq in 1Q, as its Kertih JV’s performance was negatively impacted in the immediately-preceding 4QFY23 by an unrealised forex translation loss (due to depreciation of ringgit vs. US$) which did not recur in 1QFY24. We think its independent tank terminals, comprising 46%-owned PITSB and 100%-owned Langsat, maintained their strong utilisation rates at above 90% and strong monthly storage rates of above S$6/cbm in 1QFY24, which have been the case since late-CY22. Higher interest rates may have negatively impacted the tank terminal net profits yoy in 1Q (as 40% of Dialog’s borrowings were on floating interest rates), but probably not on a qoq basis, as US$ and S$ interest rates have been largely stable. Dialog noted that its core EPCC and plant maintenance operations performed less well on a yoy basis, due to project cost overruns and labour cost increases; however, we think there is a possibility the qoq performance may have improved as legacy projects run off.

Potential Exclusion From FBMKLCI Index May Happen in Dec 2023

Potential share price re-rating catalysts include the completion of loss-making EPCC work by mid-CY24F, and a likely upward revision in the Petronas umbrella plant maintenance rates when the 5-year contract is renewed on 1 Jul 2024F; we expect these to boost Dialog’s sustainable profitability. Downside risks include unexpectedly large final losses as Dialog completes its legacy EPCC contacts, as well as Dialog’s likely exclusion from the FBMKLCI index next month. However, we view any potential share price sell-off as a good opportunity to accumulate for the recovery in Dialog’s profits in FY24-25F.

Source: CGS-CIMB Research - 14 Nov 2023