Dialog’s 2QFY22 core net profit of RM130.7m (+4% QoQ, +9% YoY) and a 1HFY22 core net profit of RM256.0m (+3% YoY) came in slightly below expectations, at 44% of both ours and consensus full-year estimates. With the imminent ease of international travel restrictions in CY22, we see Dialog as a beneficiary as PDT will be able to welcome foreign clients and investors, potentially boosting Dialog’s downstream EPCC and midstream take -or-pay tank terminals business. We maintain BUY with a slightly lower SOP-derived TP of RM3.32.

Slightly below expectations. Dialog’s 2QFY22 core net profit of RM130.7m (+4% QoQ, +9% YoY) and a 1HFY22 core net profit of RM256.0m (+3% YoY) came in slightly below expectations, at 44% of both ours and consensus full-year estimates. We expect Dialog to see clearer skies in 2HFY22 as the group has already nabbed 3 Petronas-related EPCC jobs in FY22, which would contribute positively to the group’s profits in upcoming quarters.

Dividends. No dividends were declared, as expected. Dialog typically announces its dividend payout in 3Q and 4Q.

QoQ. Revenue was up by 8% QoQ while core profit increased by 4% and we believe that the improved performance was due to the general economic recovery and less stringent business environment. Recall that the group may have been impacted by lockdown period in July-Aug 2021, resulting in lower revenues and higher operating expenses for its EPCC downstream business in 1QFY22.

YoY. Revenue and core profit was up 55% and 9% respectively and this was primarily attributed to the contribution from its newly commissioned Dialog Terminals Pengerang 5 (DTP 5), which is part of its Phase 3A PDT project. We note that DTP 5 has a storage capacity of 430,000 m3 and is dedicated for BP Singapore Pte Ltd.

YTD. Revenue was up by 54% but core profit was only up by 3%. We believe that the squeeze in profit margins was attributed to: (i) higher operating costs due to stringent Covid-19 related SOPs from its downstream business; (ii) higher project costs; and (iii) more project delays which affected its profit margins.

Outlook. Dialog will continue to be one of the key beneficiaries of Pengerang’s development due to its exposure in tank terminals, EPCC and maintenance services. In addition to Dialog’s Terminals Langsat 1 and 2 with a total capacity of 650,000 m3, Langsat 3 has commenced full operations for its 120,000 m3 storage facility in Jan 2020. The construction works of the 430,000m³ storage capacity under Phase 3A of Pengerang Deepwater Terminals (PDT) was completed in March 2021 whilst, the 85,000m³ capacity expansion of Langsat 3 is slated for full completion by the end of CY21. With the imminent ease of international travel restrictions in CY22, we see Dialog as a beneficiary as PDT will be able to welcome foreign clients and investors, potentially boosting Dialog’s downstream EPCC and midstream take-or-pay tank terminals business.

Forecast. We cut our FY22-24 net profit forecasts by 7%, 5% and 3% respectively to account for lower downstream EPCC profit margins.

Maintain BUY – slightly lower TP of RM3.32. Our SOP-derived TP of RM3.32 (from RM3.38) implies a 15% upside to current share price. Valuation wise, Dialog is currently trading at FY23F P/E of 27x, which is at about 20% discount to its pre pandemic mean of 32x in 2019. We continue to like Dialog for its recurring income type of business model and we deem it as one of the only listed secular growth stock in the local oil and gas space.

Source: Hong Leong Investment Bank Research - 16 Feb 2022