DIALOG’s 1QFY23 results were largely flattish, coming in within expectations. While revenue was boosted by higher downstream activities, cost overruns continued to drag earnings. Going forward, we believe the group’s long-term prospects remain largely intact, with further developments on Pengerang Phase 3 to act as a potential re-rating catalyst. Maintain OUTPERFORM and SoP-TP of RM3.10.

1QFY23 results within expectations. DIALOG’s 1QFY23 core net profit of RM133m (arrived after adjusting for impairments) came in within expectations at 25% and 23% of our and consensus full-year forecasts, respectively.

Earnings remained flattish. YoY, 1QFY23 earnings grew a marginal 3%. While revenue saw a strong recovery led by higher downstream EPCC and O&M activities, this was partially offset by: (i) cost overruns and project losses amidst higher material and labour costs, (ii) higher finance costs, and (iii) higher JV contributions from the completed acquisition of Pan Orient Energy.

Further development of Pengerang a key catalyst. Looking ahead, further developments of Pengerang Phase 3 will be DIALOG’s key focus. Phase 3 is designated for dedicated terminals serving mid-to long-term clients. With the start-up of Petronas’ Pengerang Integrated Complex (PIC), we believe this would help DIALOG to expedite talks with potential partners. DIALOG also has another 500 acres of land in the Pengerang area available for further developments in the longer term. Meanwhile, with the current expansion of its Langsat Terminals now completed, DIALOG still has another 17 acres of land in Langsat, which could potentially add another 200k cubic meters of storage capacity in the future – thus bringing Langsat’s total capacity to ~1m cubic meters.

Forecasts. No changes to our FY23-24F numbers.

Maintain OUTPERFORM, with unchanged SoP-TP of RM3.10. There is no change to our valuation based on ESG given a 3-star ESG rating as appraised by us (see Page 4).

Overall, despite the short-term challenges, the group’s long-term outlook still remains largely intact, with its mid-stream assets to also provide a degree of earnings defensiveness and resiliency. That said, any further development of its Pengerang Phase 3 is expected to serve as a potential re-rating catalyst for the stock.

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

Source: Kenanga Research - 16 Nov 2022