DIALOG’s FY23 results were slightly below our expectation, but met consensus’ forecast. YTD earnings declined slightly due to margin compression at the downstream segment. Nevertheless, on an encouraging note, 4QFY23 EBITDA margin finally reversed its sequential downtrend since 2QFY21. We kept our FY24F earnings unchanged, while introducing new FY25F numbers, and maintain our TP of RM3.10 and OUTPERFORM call.

Results missed our expectation slightly. FY23 core net profit of RM501m missed our forecast by 6% but was within consensus’ expectations. The slight variance versus our forecast was mainly attributed to lower-than-expected contribution from DIALOG’s new 50%- owned joint-venture (JV), Pan Orient Energy (Siam) Ltd (POE).

Muted YTD results due to drag from downstream projects. YTD topline soared by 29% due to higher contribution across the board, particularly from offshore project implementation at Bayan field. However, bottomline (-1%) was dragged by: (i) maintenance activities and higher operation costs at the upstream segment, (ii) increased finance costs at the Tanjung Langsat and Pengerang terminals, and (iii) margin squeeze at the downstream segment. The latter was attributed to cost overruns and project losses due to: (i) higher material price and labour costs, and (ii) delays emanating from manpower constraints. The above more than offset the surge in contribution from JV and associates (+45%), mainly driven by maiden contribution (since 1QFY23) from POE.

QoQ margin recovery. On an encouraging note, QoQ, EBITDA margin jumped to 19% (3QFY23: 15%) which marks a reversal in sequential margin compression since 2QFY21. We attribute this to the progressive completion of legacy contracts that did not price in higher costs from the current inflationary environment. However, in spite of this, earnings contracted QoQ due to lower contribution from associates and JV.

Leveraged to new investments at Pengerang. We expect DIALOG’s midstream business to continue to do well on the back of robust rates and utilization. This is partly boosted by new capacity uptake at Pengerang, emanating from storage of refined oil products bound for Australasia. Meanwhile, we also expect downstream margins to gradually inch up following the completion of legacy contracts by endFY24. Lastly, DIALOG’s ambitious expansion plans at Pengerang and Tanjung Langsat remain on track. We believe there may be potential interest from new investors at Pengerang that include Singapore-based ChemOne and China’s Rongsheng Petrochemical. Recall that Rongsheng has committed to invest up to RM80b for a refinery, whilst ChemOne targets to launch a USD4b (RM18b) petrochemical facility by mid-2026.

Forecasts. We maintain our FY24F earnings, while introducing FY25F 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).

Source: Kenanga Research - 16 Aug 2023