• BUY, new SOP-based MYR2.96 TP from MYR3.40, 30% upside and c.2% FY22F (Jun) yield. Dialog’s 9MFY22 core earnings fell below estimates, due to weaker margins. Despite cutting our earnings projections, we still expect the company to deliver 8-9% YoY growth in FY23-24, led by its revenue recovery. Its valuation remains undemanding – it is trading at 25x FY23F P/E, below -1SD from the 5-year mean.

• Results below expectations. At 70% and 68% of our and Street full-year estimates, Dialog’s 9MFY22 core earnings of MYR387m (+3% YoY) came in below expectations on softer-than-expected margins.

• Core earnings remained flattish QoQ at MYR131m, despite higher revenue (+9% QoQ) masking weaker JV & associate profits (-19% QoQ, on lower spot terminal rates). 9MFY22 revenue surged 51% YoY on the back of a recovery in business activities from both the domestic and foreign operations. However, the adjusted EBITDA margin contracted to 23% in 9MFY22 from 34% in 9MFY21, attributed to higher costs resulting from stringent COVID-19 standard operating procedures, supply chain disruptions, and higher raw material prices and logistics costs that have affected project schedules.

• Margin pressure to persist in the near term. With the gradual re-opening of borders and pick-up in business activities, downstream activities – including engineering, procurement, construction and commissioning (EPCC), specialist products & services, plant maintenance, and catalyst- handling services are likely to continue recovering. Still, margins may remain under pressure – no thanks to higher project costs as a result of higher labour, raw material and logistics costs amidst supply chain disruptions triggered by the Russia-Ukraine war. Meanwhile, upstream earnings also accounted for a bigger portion, at >20% of 9MFY22 earnings, led by strong oil prices. Dialog guided that independent terminals are still operating at mid-80% utilisation rates. The monthly spot storage rates have weakened to mid -SGD5.00 and are expected to stabilise at current levels.

• We cut FY22-24F earnings by 8-11% after imputing lower margins. It may also take longer than expected to seal the new additional tank terminal capacity expansion for Pengerang Phase 3, as most clients are spending cautiously at present. Our SOP-based TP drops to MYR2.96 from MYR3.40 after we adjusted our earnings forecasts and ascribed a higher discount of 50% (from 20%) to the Pengerang Phase 3 valuation. We applied a 0% ESG premium/discount, as Dialog’s ESG score is on par with the country median. The development of the recycled polyethylene terephthalate pellets production facility is still on track, and should be operational by 2023.

• Downside risks: Weaker-than-expected tank terminal rates, and slower- than-expected expansion of Pengerang Phase 3.

Source: RHB Research - 18 May 2022