Despite a slow 1QFY22, mainly dragged by higher project costs amidst stringent Covid-19 SOPs, supply chain disruptions and logistic costs, DIALOG’s long-term outlook remains largely intact, with its resilient terminal business providing a defensive baseline to earnings. At current levels, the stock is still trading at a discount to mean valuations. Maintain OP with TP of RM3.50.

1QFY22 broadly within expectations. DIALOG reported 1QFY22 PATAMI of RM128.8m, coming in at 20% of our, and 22% of consensus, full-year forecasts. We deem this to be broadly within expectation, in anticipation of a stronger 2H amidst an expected recovery in downstream activity levels. No dividends were announced, as expected.

Overall a weaker quarter. YoY, the quarter saw a decline of earnings by 12%. Although revenue saw a healthy 52% recovery, presumably thanks to higher downstream activities, the quarter suffered from higher project costs due to stringent Covid-19 SOPs, supply chain disruptions and logistic costs. Similarly, for QoQ, earnings declined 7%, dragged by slower activity levels (revenue declined 3%), higher finance costs, coupled with the aforementioned higher project costs.

Long-term outlook still intact. Despite near-term challenges amidst the lockdowns, DIALOG’s long-term outlook and earnings resiliency from its mid-stream assets remain largely intact. Petronas’ RAPID facilities are expected to commence in the coming months, and we believe this will help improve prospects for its Pengerang Phase 3, with the group still sitting on 500 acres of Pengerang land ready for future expansions. Going into FY22, Pengerang Phase 3A will see full-year earnings contribution, while the expansion of its Langsat Terminal facility by a further 85k cubic meters (from 770k currently) is expected to be completed by mid-FY22. We believe these, coupled with an expected recovery in downstream activities, should provide the group with ample growth opportunities in the coming 1-2 years.

Maintain OUTPERFORM, with unchanged SoP-TP of RM3.50 (implying 31x forward PER). No changes to our FY22E/FY23E numbers post- results.

Despite some rebound in its share price recently, the stock is still trading at roughly 1.5SD below its mean valuations. We feel these levels have yet to adequately price in its growth prospects from Pengerang, especially with most of its long-term outlook still remaining intact.

Risks to our call include: (i) lower utilisations of its tank terminals, (ii) slowdown in downstream jobs flow, and (iii) delay in the development of Pengerang Phase 3.

Source: Kenanga Research - 17 Nov 2021