• Keep BUY and MYR2.98 TP, 16% upside with c.2% FY23F (Jun) yield. Dialog’s 1HFY23 core earnings of MYR259m (+1% YoY) were in line, as improved international operations cushioned lower upstream profit and continued margin weakness. Despite this, we still expect margin to recover gradually to deliver 4-12% earnings growth in FY23F-25F. We are also positive on the Langsat 3 expansion plan as it caters to the growing interest in low carbon fuel alternatives. Its current valuation of 26x FY24F P/E is still below its 5-year mean of 29x.

• Results within our expectations. At 46% and 44% of our and Street full- year estimates, 1HFY23 core earnings of MYR259m (+1% YoY) came in within our expectations. No dividend was declared this quarter, as expected.

• 2QFY23 core earnings dropped marginally (-1% QoQ) to MYR129m, no thanks to weaker adjusted EBITDA margin at 13% (vs 1QFY23’s 15%) despite better topline (+12% QoQ; led by increased engineering, construction and plant maintenance activities). This was also cushioned by higher JV & associate contributions (+16% QoQ, better Pengerang independent storage terminal contribution that masked lower Pan Orient Energy Corp numbers). Cumulatively, 1HFY23 core earnings inched up 1% to MYR259m on the back of higher international operations profit offsetting lower domestic downstream and upstream contribution as a result of higher operations costs.

• Outlook. Separately, Dialog announced to expand the Langsat 3 terminal by approximately 24,000 m3 storage capacity for sustainable and renewable fuel products ie sustainable aviation fuel and biodiesel. The investment cost is estimated at MYR100-130m and the project is slated for completion by 4QCY24. Although earnings impact, in our view, is rather minimal, we are positive on such development as it caters to the growing interest in low carbon fuel alternatives. Management guided that independent terminals have seen better utilisation rates above 90%, vs mid-80% in the previous quarter, and the monthly spot storage rates are now at also above c.SGD6/cbm. The award of the Baram Junior Cluster small field asset production sharing contract will also further expand its domestic upstream assets. We believe downstream activities will remain robust led by better engineering, construction and plant maintenance, as well as an improved outlook for fabrication and specialty products despite cost challenges persisting.

• We maintain our earnings estimates with an unchanged SOP-based TP of MYR2.98, incorporating a 0% ESG premium/discount, as Dialog’s ESG score is on par with the country median. Downside risks: Weaker-than- expected tank terminal rates, and slower-than-expected expansion of Pengerang Phase 3.

Source: RHB Research - 17 Feb 2023