Kenanga Research & Investment

Dialog Group - Venture Into Specialty Chemicals

Publish date: Tue, 26 Sep 2023, 03:05 PM

DIALOG will build, own and operate a USD80m (RM375m) specialty chemical plant that produces malic acid (capacity: 12ktpa) in Gebeng, Pahang. The group will also undertake the plant’s EPCC works, which will commence immediately and reach completion by 2QCY26. We commend DIALOG’s efforts to diversify its earnings via conservative bite-sized ventures. We maintain our forecasts, TP of RM3.10 and OUTPERFORM call.

Maiden foray into specialties. The plant will be located within the Gebeng Integrated Complex (GIC) operated by BASF PETRONAS Chemicals Sdn. Bhd. PCHEM currently operates petrochemical plants with estimated gross capacity of more than 1.7mtpa in GIC. This is DIALOG’s first venture into the production of specialty chemicals.

This new plant will be financed from DIALOG’s internal funds, and/or bank borrowings including proceeds from sukuk issuance. We believe it can be effortlessly funded by the group given its net cash position and deep cash coffers of RM1.7b.

Smallish malic acid capacity. We understand that malic acid is mainly used as a food additive and to produce pharmaceutical products. In addition, its derivative, malate anion, is an intermediate used in the citric acid cycle. Meanwhile, feedstock for the plant’s production will be supplied by local vendors. We believe that DIALOG’s may potentially source the plant’s feedstock from PCHEM’s maleic anhydride facility which is also located at GIC. The latter will have capacity of 113 ktpa and is targeted for completion in 2HCY25.

Application in food and pharmaceuticals. We are positive on this new venture as recurring revenue from the production of specialities will kick in after DIALOG completes the plant’s EPCC. Furthermore, we believe that DIALOG will benefit from existing infrastructure available at GIC such as port facilities, utilities supply, etc.

Lastly, we commend DIALOG’s efforts to diversify its earnings via bite sized ventures to test the waters. Recall that the group had also recently dabbled into the production of food grade recycled PET pellets. The USD25m plant (stake: 51%) for the latter is currently at the commissioning stage.

Although the outlook for specialty chemicals is currently not favourable, the market may stage a recovery by the time the plant is commissioned. Furthermore, we believe that demand for malic acid should be fairly resilient given its application in staple consumer products. On top of that, margins for specialties are more resilient vis-à-vis commoditized basic petrochemicals. This is given limited supply and higher value-add for these niche products.

Maintain forecasts. Our forecasts remain unchanged at this juncture, given that contribution from this new plant will only materialize from 4QFY26 onwards.

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 5).

Source: Kenanga Research - 26 Sept 2023

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