DIALOG's results beat expectations for the second time in FY24 due to the strong performance of is specialist product segment. Its FY24 core net profit was driven by lower finance costs and improvement in specialist product top line. Its earnings remain on an upward trajectory, underpinned by improving EPCC margins as cost pressures ease. We raise our FY25F net profit forecast by 5%, lift our TP by 4% to RM3.37 (from RM3.23) and maintain our OUTPERFORM call.

Its FY24 core profit of RM606.8m (excluding RM13.5m loss on other investments, RM1.0m gain on disposal of PPE, RM22.5 m impairment (largely due to impairment in a project involving food-grade recycled polyethylene terephthalate pellets)) beat our expectations at 106% but within consensus at 104%. The variance against our forecast came largely from higher-than-expected revenue at the specialist product business segment (particularly the drilling base fluids and oilfield chemicals).

YoY, FY24 revenue increased by 5%, driven by enhanced upstream production and higher sales of specialist products and services, particularly on the international front. Core earnings grew by a sharper 20% due to: (i) lower finance costs from reduced borrowings, and (ii) a stable trend in operating expenses. These gains offset the losses from its legacy EPCC projects, which were impacted by a mismatch in pricing of previously committed projects.

QoQ, its top line surged by 15%, supported by stronger revenue from the upstream and specialist product segments. However, core profit remained flat, as increased operating expenses were partially offset by stronger QoQ performance from joint ventures and associates, driven by improved results from its independent tank terminals.

Outlook. Dialog's earnings are on an upward trajectory, driven by improved rental rates for its independent terminals (close to SGD7/mth/cbm at this juncture) and enhanced performance in the upstream segment, particularly in production. The company has also benefitted from easing cost pressures. In the coming quarters, its EPCC and plant maintenance division is expected to return to profitability as new contracts begin to be recognised, reversing losses in FY24. Additionally, Dialog has embarked on a renewable fuel product storage business, expanding its existing Tanjung Langsat complex to cater to the increasing demand for renewable fuel storage.

Forecasts. We raise our FY25F earnings forecast by 5% to factor in stronger revenue for the specialist product division.

Valuations. Correspondingly, we lift our SoP-based TP by 4% to RM3.37 (from RM3.23). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to like DIALOG for: (i) its structural margin recovery at its plant maintenance, EPCC and specialist product businesses as the legacy contracts completes, (ii) its earnings growth and diversification driven by the forays into upstream investments, coupled with its exposure in the tank storage business which also serves as a hedge during recessions, and (iii) its early exposure in the low carbon storage solutions. Maintain OUTPERFORM.

Risks to our call include: (i) reversal of the easing cost pressures trend, (ii) delay in capacity expansion plans, and (iii) reduced utilisation of tank terminals.

Source: Kenanga Research - 16 Aug 2024