• Keep BUY and MYR2.98 TP, 24% upside and c.2% FY23F (Jun) yield. Post site visit, we re-iterate our stance that Dialog will continue to be one of the key beneficiaries of the Pengerang development due to its exposure in the midstream and downstream divisions. In the near term, independent terminals could be buoyed by better utilisation and monthly storage rates while new capacities expansion could be on the cards.

• Pengerang Deepwater Terminals (PDT) site visit. On Monday, Dialog hosted an investor relations visit to its PDT. Last month, c.190 vessels berthed at PDT and the total vessels berthed YTD-FY23 amounted to >1,300, which is higher than FY22’s 1,170 vessels. The bulk of the products were shipped from the Middle East. As such, Dialog guided that independent terminals have seen better utilisation rates of closer to 95%, vs 90% in the previous quarter, and the monthly spot storage rates are now at above c.SGD6/cbm (from mid-SGD5/cbm last year). Meanwhile, earnings impact for Pengerang Terminals (Two) (PT2SB), is largely unaffected although the Pengerang Integrated Complex (PIC) commercialisation was delayed due to its take or pay structure. Payment wise, it is expected to catch up in the near term as PIC commercialisation is scheduled in 2H23.

• New expansion soon? The overall operating expenses for storage terminals have been fairly manageable. That said, due to the increase of manpower cost and raw material prices, Dialog guided that the EPCC cost of storage terminals have increased to MYR2,000-3,000/cbm, as compared to PT5’s EPCC cost of c.MYR1,800/cbm. Should it be able to lock in new capacities with clients, we estimate the project’s internal rate of return (IRR) to still fetch 8-12%. There is still no update on the new dedicated tank terminal expansion, but there were more site visits arranged recently with potential clients and management is hoping to see some expedition in the near term. The Pengerang fabrication yard is also poised to benefit from the potential EPCC and maintenance works if there is new capacities expansion in Pengerang.

• 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. Note that we have valued Pengerang Phase 3 expansion at MYR0.45/share, based on gradual ramp up in capacity expansion of 5m cbm, 5.9% WACC, 51% equity stake and 50% discount. The discount is mainly to price in the limited information on how Pengerang Phase 3 will be fully developed while the new expansion has been slower-than-expected especially during the pandemic. Note that Downside risks: Weaker-than-expected tank terminal rates, and slower- than-expected expansion of Pengerang Phase 3.

Source: RHB Research - 8 Mar 2023