• Keep BUY and MYR2.79 TP, 50% upside and c.2% FY24F (Jun) yield. Dialog’s 1HFY24 results are in line, with core earnings strengthening by 10% YoY, backed by a ramp-up in its domestic and international operations. The stock is trading at 20x FY25F P/E, which is below -1SD from its 5-year mean of 26x. Despite the recent dropout from the FBMKLCI and MSCI, we see the group’s recent earnings recovery as a near-term catalyst, with new midstream capacity expansion as long term growth drivers.

• Results within expectations. At 49% and 51% of our and Street full-year estimates, 1HFY24 core earnings of MYR284m (+10% YoY) are within expectations. No dividend was declared, as expected.

• 2QFY24 core earnings grew 6% QoQ to MYR148m after stripping off items that include a MYR1m fair value gain on other investments, and MYR1m in FX gains. Revenue improved 10% QoQ while EBITDA rose 38% QoQ on a better product mix. This was partially offset by lower JV & associates contribution (-14% QoQ; weaker storage terminal contribution as a result of deferred tax charges and weaker Pan Orient Energy Corp (POEC) numbers). YoY, core earnings also strengthened by 13% due to stronger profits from its domestic (+25% YoY; higher production from upstream operations and narrowed losses of certain downstream projects) and international operations. The latter was mainly backed by higher specialist products and services revenue, a pick-up in EPC and plant maintenance activities in Singapore and New Zealand.

• Outlook. While downstream activities are expected to stay strong, we expect margins to improve as legacy contracts slowly phase out by the end of FY24. The downstream segment should see new contracts and new rates cater to the current high cost environment. Average EPCC margin is guided to normalise to a mid-single digit. This is compared to the current legacy contracts where some are in losses. However, the group is in discussion with clients for potential cost reimbursement. Occupancy levels and monthly storage rates for independent terminals are still well sustained, at above 90% and above SGD6.50/cbm. Production for the Baram Junior Cluster development is expected by end 2026 or early 2027, if the green light is given after two years of evaluation. For its existing fields, Dialog has ongoing programmes to maintain its production level, which includes drilling activities for its field in Thailand (POEC’s production at 2kbpd). As drilling activities will persist into the coming quarters, management expects the elevated amortisation charges to continue.

• Still BUY, while we maintain our estimates with an unchanged SOP-based TP of MYR2.79. This includes a 6% ESG discount, based on an ESG score of 2.7. Downside risks: Weaker tank terminal rates and slower-than-expected expansion of Pengerang Phase 3.

Source: RHB Research - 20 Feb 2024