Dialog’s 1QFY23 core net profit of RM132.7m (+12% QoQ, +6% YoY) came in well within expectations at 24%/23% 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 its downstream EPCC and midstream take-or-pay tank terminals business. We make no major changes to our FY23-25f forecasts. 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 SOP-derived TP of RM3.04.

Within expectations. Dialog’s 1QFY23 core net profit of RM132.7m (+12% QoQ, +6% YoY) – having adjusted for: (i) RM0.2m gain on disposal of PPE and (ii) impairment loss on PPE – came in well within expectations at 24%/23% of our/consensus full-year estimates.

Dividends. No dividends were declared in 1QFY23 – within expectations. Dialog typically declares dividends in May and Oct annually.

QoQ. Revenue and core net profit increased by 5% and 12% respectively QoQ. We highlight that the group’s business in Asia has finally turned profitable in 1QFY23, but was slightly offset by lower contribution from Australia & New Zealand. However, we understand that the group is still bearing the brunt of higher material prices and labour costs amidst the inflationary pressures and manpower constraints.

YoY/YTD. Revenue was up by a whopping 41% 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 only up 6% 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.

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. Minor tweaks after updating the group’s latest annual report figures.

Maintain BUY, TP of RM3.04. We maintain BUY on Dialog with a relatively unchanged SOP-derived TP of RM3.04 (from RM3.00) which implies a 51% upside to current share price. Valuation wise, Dialog is currently trading at FY24F P/E of 21x, which is at about a 35% 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 Nov 2022