• Keep BUY and MYR2.96 TP, 22% upside and c.2% FY23F (Jun) yield. Dialog’s FY22 core earnings came in within our expectations. Marginal QoQ improvement in EBITDA margin in 4QFY22 was offset by higher finance costs and depreciation charges. We like the stock for its decent 7-11% growth in FY23F-25F with further upside upon the completion of Pan Orient Energy Corp – Thailand’s upstream asset acquisition – slated by August.

• Results within our expectations. At 97% and 93% of our and Street full- year estimates, Dialog’s FY22 core earnings of MYR504m (flat YoY) came in within our, but was below Street expectations.

• 4QFY22 core earnings dropped 10% QoQ at MYR117m, despite higher revenue (+14% QoQ) amidst flattish JV & associate contributions (-1% QoQ). This was largely due to lower other income (-54%) and higher finance costs (+1.8x) masking stronger EBITDA (+19%). FY22 revenue surged 44% YoY on the back of a recovery in business activities from domestic and foreign operations. However, the adjusted EBITDA margin contracted to 22% in FY22 from 32% in FY21, attributed to higher costs resulting from stringent COVID-19 standard operating procedures, supply chain disruptions, as well as higher raw material prices and logistics costs that have affected project schedules.

• Outlook. With the gradual re-opening of borders and a 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. While we are still cautious over margin pressure, EBITDA margin picked up slightly QoQ to 21.5% in 4QFY22 from 20.7% in 3QFY22. Overall, we also saw decent QoQ recovery in overseas contribution but domestic operations took a hit in 4QFY22 as a result of higher project costs and losses in one of the EPCC projects. Meanwhile, upstream earnings also accounted for a bigger portion, at >20% of FY22 earnings, led by strong oil prices. Dialog guided that independent terminals are still operating at mid- 80% utilisation rates. The monthly spot storage rates remained at SGD5-6 and are expected to stabilise at current levels.

• We maintain our earnings estimate and our SOP-based TP of MYR2.96. We apply a 0% ESG premium/discount, as Dialog’s ESG score is on par with the country median. Note that we have yet to factor in the proposed acquisition of Pan Orient Energy Corp. Based on our back-of-envelope calculation, the proposed acquisition will increase FY23F-24F earnings by 6-7%. 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 - 19 Aug 2022