DIALOG’s 9MFY23 results tracked expectations, in spite of sustained cost pressures. Earnings were boosted by chunky contribution from its new 50%-owned joint-venture (JV), Pan Orient  Energy (Siam) Ltd (POE). We continue to like DIALOG for its resilient non-cyclical earnings with potential for multi-year growth driven by future capacity expansion at Tanjung Langsat and  Pengerang Phase 3. We maintain our forecasts, TP of RM3.10 and  OUTPERFORM call.

Earnings on track. 9MFY23 core net profit of RM392m met expectations, coming in at 73% and 71% of our full-year forecast and the full-year consensus estimate, respectively.

YTD earnings boosted by upstream JV. The slight growth (+1%) in  YTD profit largely emanated from Dialog’s 50%-owned joint venture JV,  POE, an upstream player as mentioned above. Recall that maiden contribution from this JV had already commenced earlier, since  1QFY23. Correspondingly, this led to a 43% YTD surge in contribution from associates and JV which more than offset the earnings drag from margin compression at the downstream segment.

Margin squeeze prevails. Improved execution of downstream projects  (i.e. EPCC, catalyst handling, and plant maintenance) led to strong YTD  revenue growth of 41%. To a lesser extent, top line was also boosted by higher project implementation activities at Bayan field. However,  these projects continued to be plagued by inflationary cost pressures on materials and manpower. Evidently, YTD EBIT margin halved to 7%  (9MFY22: 14%). On top of that, YTD earnings were also weighed down by higher financing costs at the Tanjung Langsat and Pengerang terminals. Therefore, despite top line expansion and lower taxes, core net profit growth was muted.

Multi-year expansion on the cards. Dialog’s long-term earnings visibility from existing mid-stream assets is enhanced by multi-year growth prospects. This is on the back of future capacity expansion at remaining acreage located at: (1) Tanjung Langsat: 17 acres (200k m3 ),  and (2) Pengerang Phase 3: 500 acres. Meanwhile, in the immediate term, Dialog is developing Tanjung Langsat Terminal Phase 3  (capacity: 24k m3 ). This project (completion: end-CY24) comprises storage facilities for low carbon alternative fuels (i.e. biodiesel,  sustainable aviation fuel etc). We believe this venture enhances  Dialog’s ESG appeal, given that it caters to sustainable products.  Moreover, we expect robust demand for green storage on the back of global sustainability trends.

Forecasts. Maintained.

Maintain OUTPERFORM with unchanged TP of RM3.10 based on  Sum-of-Parts valuation. Meanwhile, our 3-star ESG rating on Dialog remains status quo (see Page 4).

Our optimism on Dialog stems from its resilient non-cyclical earnings with upside potential as highlighted above. Moreover, the Group is actively diversifying into upstream investments, including production  assets. This adds the alpha factor to the Group’s profits, enabling it to  capitalize on oil price rally. Dialog’s current portfolio of production-sharing contracts include Baram Junior Cluster, D35/D21/J4 and  Concession L53/48 (Thailand).

Risks to our call include: (i) prolonged and intensifying cost pressures, (ii) delay in capacity expansion plans, and (iii) reduced utilization of tank terminals.

Source: Kenanga Research - 19 May 2023