DIALOG’S 1QFY23 results met expectations as quarterly earnings improved QoQ and YoY, driven by a stronger top line, better gross margin as well as higher JV earnings on increased storage tank utilisation. We remain positive over its near-term earnings outlook underpinned largely by easing cost pressures. We maintain our forecasts, TP of RM3.10 and OUTPERFORM call.

1QFY24 within expectations. Its 1QFY24 core profit of RM137.9m (after excluding EI of RM7.7m loss of other investments and RM2m forex gain) met expectations at 25% of both our full-year forecast and the full-year consensus estimate. No dividends were declared for the quarter.

YoY earnings growth driven by international business and JV. YoY, its 1QFY24 top line grew 9.7% due to higher revenue from specialist products & services in various countries as well as the ramp-up in activities at Jubail Supply base, coupled with higher billings from EPCC work jobs in Singapore and New Zealand.

However, its core earnings only grew 6.2% YoY weighed down by higher interest costs (+16.9% YoY), partially cushioned by an 11.7% improvement in JV profits due to higher utilisation rate at its tank storage facilities.

QoQ earnings growth driven by JV and core businesses. QoQ, its top line grew 13.1% due to a pick-up in activities for its core businesses (plant maintenance, specialist products). Correspondingly, its net profit rose by a larger 15.2% driven by stronger JV contributions (+14.5%).

We noticed that its opex increased at a slower pace as compared to top line, an early sign of supply-chain cost pressures easing.

Recovery emerging. After flattish showing in FY23, Dialog’s independent terminals are showing growth in FY24 with utilisation seen to be ramping back up slightly in the latest quarter. For its core business portfolio, there have been signs of cost pressure easing and we believe the gradual ramp-up in activities (both upstream and downstream) will result in improved gross margins in the near to medium term. On the other hand, DIALOG still owns 500 acres of land for longer-term development in Pengerang.

Forecasts. Maintained.

We also keep our TP of RM3.10 based on Sum-of-Parts valuation (see Page 2). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We continue to like DIALOG for: (i) the resilient earnings from its noncyclical businesses such as operation of storage facilities and plant maintenance, (ii) its earnings growth and diversification driven by the forays into upstream investments, including production assets (its current portfolio of Production Sharing Contracts includes Baram Junior Cluster, D35/D21/J4 and Concession L53/48 in Thailand, and (iii) its strong track record in project execution. Maintain OUTPERFORM

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 - 15 Nov 2023