Dialog’s 4QFY22 core net profit of RM118.2m (-10% QoQ, -7% YoY) and FY22 core net profit of RM506.1m (-1% YoY) came in came in marginally below expectations at 94%/93% of our/consensus full-year estimates. With the ease of international travel restrictions in FY23, 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 trim Dialog’s FY23-24f net profit forecasts by 14% and 13% respectively to account for lower downstream EPCC profit margin assumptions. We also view Dialog as one of the only listed long-term secular growth stock in the local oil & gas space. Maintain BUY with a lower SOP-derived TP of RM3.00.

Slight miss. Dialog’s 4QFY22 core net profit of RM118.2m (-10% QoQ, -7% YoY) and FY22 core net profit of RM506.1m (-1% YoY) came in marginally below expectations at 94%/93% of our/consensus full-year estimates. We believe that the key variance against our forecasts was due to lower-than-expected profit margins from its downstream EPCC business, mainly due to higher project costs and losses in one of the EPCC projects in Asia.

Dividends. No dividends were declared in 4QFY22 – within expectations. Second interim and final dividend will typically be announced in Oct. Total dividends in FY22 so far: 1.3sen/share.

QoQ. Revenue was up 14% but core net profit was down 10% QoQ respectively and we believe that the margin squeeze stemmed from higher raw material prices and labour costs, which inevitably resulted in cost overruns and project losses in its downstream segment.

YoY. Revenue was up by 29% 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. However, we note that core profit was down 7% YoY and we believe that this was due to the margin squeeze from its downstream EPCC business due to higher material price and labour costs, which inevitably resulted in cost overruns and project losses in its downstream segment.

YTD. Revenue was up by 44% but core profit was marginally down by 1%. 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 material costs; and (iii) severe supply chain disruption which affected its profit margins, which inevitably resulted in cost overruns and project losses in its downstream segment.

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 430,000m³ storage capacity under Phase 3A of Pengerang Deepwater Terminals (PDT) was commissioned in Feb 2021. With the ease of international travel restrictions in FY23, 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. Also, Dialog is taking various measures including negotiating with clients for reimbursement and compensation for the project overruns caused by inflationary pressures and external macroeconomic factors.

Forecast. We trim FY23-24f net profit forecasts by 14% and 13% respectively to account for lower downstream EPCC profit margin assumptions.

Maintain BUY but with lower TP of RM3.00. We maintain BUY on Dialog with a lower SOP-derived TP of RM3.00 which implies a 24% 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 - 19 Aug 2022