DIALOG’s flattish 1HFY23 results were 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. We maintain our forecasts, TP of RM3.10 and OUTPERFORM call.

1HFY23 results within expectations. 1HFY23 core net profit of RM260m came in within expectations at 49% and 45% of our full-year forecast and the full-year consensus estimate, respectively.

Earnings remained flattish. YoY, 1HFY23 core net profit remained flattish with a marginal 1% growth. While revenue grew due to increased business activities, especially from its downstream segment, these were offset by the higher project costs. Affected by supply chain disruptions, higher material prices and labour costs, the group suffered cost overruns and project losses as they remain committed in completing and delivering projects at hand.

Ventures into renewable fuel storage. Meanwhile, DIALOG has also announced the expansion of its Langsat Terminals capacity by 24k m3 for the storage of renewable feedstock and fuel. Engineering and construction works will commence immediately, and the expansion is expected to be completed by end-2024. Overall, while earnings contribution from this expansion is likely to be small, we see this is as a positive for the group, especially from an ESG angle. Apart from adopting the energy transition trend, this venture into a new product may also lease a new life to the existing terminals.

Looking ahead, further developments of Pengerang Phase 3 will still be DIALOG’s key growth catalyst. Phase 3 is designated for dedicated terminals serving mid-to-long-term clients. With the start-up of Petronas’s 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, with another 17 acres of land in Langsat.

Forecasts. Maintained.

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 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 - 17 Feb 2023