We recently participated in a conference call with the management of Dialog and we remain positive on the Company due to the potential growth in its recurring income from the completion of PDT phase 3A and Langsat 3 expansion despite the expectations of lower revenue from the lack of large scale EPCC projects. We view that Dialog is currently undervalued as its share price has fallen by >30% from its previous highs. Maintain BUY at unchanged SOP-derived TP of RM3.45.

Tank terminal rates and off-takers. Tank terminal rates have been steady, trending at about c.USD6/cbm and there have not been any issues with its off-takers thus far. Its independent terminals are fully taken up at the moment.

Tank terminal projects. Dialog has already seen a pick-up in activities from its customers as its RAPID terminals are ready to be operational. For PT2SB, the Company is looking to add more tanks to the facilities at the request of customer. Dialog is also working and talking to various parties for the expansion of Phase 3A as the common infrastructure dedicated to Phase 3A is ready along with its Jetty 3. Dialog will also continue to expand Langsat 3 if there are request for offtakes from customers. Nevertheless, we expect delays with regards to the timeline of expansion right now due to the movement control order imposed in Malaysia.

Covid-19 impact. Dialog has been affected by the lockdown measures imposed despite being classified as an essential service as supply has been disrupted due to the travel restrictions. Dialog is currently operating at about 60% capacity to ensure all the necessary SOPs are in place. Having said that, Dialog believes that it is still on track for the completion of most of its projects. There has also been 2 rounds of salary cuts for senior management and 1 round of salary cut for mid-level management since the Covid-19 pandemic begun, no salary cut was imposed for junior/lower level employees. Its offices are also currently at less than 20% capacity and it is currently in discussions with its customers to share some of these unforeseen costs.

Overseas ventures. Dialog is working towards participation of clean energy in New Zealand as the country is at the forefront of working towards carbon neutrality and the country is no longer giving offshore permits for O&G. It sees wind energy as a potential avenue as New Zealand is geographically strategic for the production of wind energy. It is also looking at other countries to expand its green energy footprint. Dialog would also explore opportunities to become an asset owner for renewables, following its build operate and transfer (BOT) projects like its tank terminal business.

ESG. On the environmental front, (i) Dialog will continue to improve on its environmental disclosures, (ii) implement more environmental initiatives and (iii) establish more climate goals. On the social front, Dialog will (i) safeguard the health, wellbeing and safety of its people and have even come out with new initiatives like the employee assistance programs (private counselling sessions) and (ii) It is also giving back to its community via the MyKasih Foundation. On the Governance front, (i) Dialog will continuously devise and improve policies and processes to ensure good corporate governance (ii) enhance risk management and internal controls framework, processes.

Maintain BUY at unchanged TP of RM3.45. We maintain our SOP-driven TP of RM3.45 as we believe that this is a good opportunity to BUY into Dialog. Its recurring income is expected to improve with the commencement of PDT Phase 3A and Langsat 3 despite impending revenue declines due to the declines in EPCC revenue from the completion of the aforementioned projects. We believe that its growth in its recurring income through its tank-terminal business is enough for us to warrant a BUY-call on the stock. Dialog has fallen by more than 30% from its 1 year peak in November 2020.

Source: Hong Leong Investment Bank Research - 5 Aug 2021