Dialog’s 2QFY23 core earnings of RM128.7m (-3% QoQ, -1% YoY) and 1HFY22 core net profit of RM261.5m (+2% YoY) came in within expectations at 46%/45% of our/consensus full-year estimates. Overnight, Dialog announced that it will be expanding its terminal operations with the development of storage facilities for renewable products at its terminal Dialog Terminals Langsat 3. While we applaud Dialog’s effort in its ESG ventures, we highlight that the earnings impact from the storage capacity of 24.0k m3 will be negligible vs. its current existing capacity of 5.1m m3. We are mildly positive on this development. 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. Maintain BUY with a SOP-derived TP of RM2.82/share.

Broadly in-line. Dialog’s 2QFY23 core earnings of RM128.7m (-3% QoQ, -1% YoY) and 1HFY22 core net profit of RM261.5m (+2% YoY) after having adjusted for: (i) RM0.3m gain on disposal of PPE; (ii) RM1.7m impairment loss on receivables; and (ii) RM7.1m impairment loss on PPE – came in within expectations at 46%/45% of our/consensus full-year estimates.

Dividends. No dividends were declared in 2QFY23 – within expectations. Dialog typically declares dividends in May and Oct (3Q and 4Q) annually.

QoQ. Revenue was up by 12% but core net profit declined 3% respectively QoQ. While Dialog recorded an increase in downstream engineering, construction, and plant maintenance activities, profit margins were compromised due to inflationary pressure and manpower constraints, which resulted in cost overruns and project losses.

YoY/YTD. Revenue was up by a whopping 44-46% and we believe that this was primarily attributed to a few reasons: (i) higher oil prices of USD93/bbl in 1HFY22 vs. USD76 in 1HFY21; (ii) more downstream activities with various engineering, construction, fabrication, and plant maintenance projects as oil major dish out more capex due to the elevated oil price environment. However, profits were flattish YoY/YTD as profit margins were squeezed due to severe supply chain disruption, higher material price and labour cost – which have inevitably resulted in cost overruns and some project losses in 1HFY22.

Newsbreak. Overnight, Dialog announced that it will be expanding its terminal operations with the development of storage facilities for renewable products at its terminal Dialog Terminals Langsat 3. Under the name Project DTL3, it is the group’s first foray into storage facilities for sustainable and renewable fuel products with a storage capacity of approximately 24.0k m3 connected to truck loading bays and existing marine facilities.

Our take on this development. The construction of Project DTL3 is expected to complete in 4QCY2024. We estimate the total capex investment for this development to range from RM100-130m with an IRR of 8-10%. We highlight that Project DTL3 is targeted to be an independent terminal for renewable products such as sustainable aviation fuel and/or biodiesel. Based on our understanding, the storage rates is expected to be at a premium to normal petroleum storage terminals. While we applaud Dialog’s effort in its ESG ventures, we highlight that the earnings impact from the storage capacity of 24.0k m3 will be negligible vs. its current existing capacity of 5.1m m3. We are mildly positive on this development.

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 205,000 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 Dialog’s FY23-25f net profit forecasts marginally by 3%, 5% and 2% respectively to account for lower downstream profit margins.

Maintain BUY, TP of RM2.82 We maintain BUY on Dialog with a lower TP of RM2.82/share (from RM3.04/share previously). Valuation-wise, Dialog is currently trading at about FY24F P/E of 28.5x, which is at about a 10% 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 - 17 Feb 2023