Investment Highlights

• We maintain BUY on Dialog Group with a lower sum-of-parts-based (SOP) fair value of RM3.55/share (from RM3.66/share), which also reflects an unchanged ESG rating of 3 stars. This implies a CY23F PE of 30x, near its 5-year average of 31x.

• We slightly reduce FY23F–FY24F earnings by 1–4% on higher project cost assumptions for downstream operations which have been pressured by high raw material/logistics costs driven by global supply chain disruptions.

• Dialog’s FY22 core net profit (CNP) of RM506mil (excluding loss on disposal and write-off of property, plant and equipment totalling RM2mil) underperformed, coming in 6%– 7% below our and consensus’ forecasts. However, Dialog declared a final dividend of 1.9 sen (+10% YoY), in line with our expectations.

• The group’s FY22 CNP dropped by a mild 3% YoY on lower downstream contributions. Nevertheless, that was partially offset by increased tank terminal business with additional earnings from Pengerang Phase 5 and Tanjung Langsat 3 projects, as well as upstream operations benefiting from elevated oil prices.

• The group’s 4QFY22 CNP fell by 11% QoQ despite a 14% YoY increase in revenue, largely due to cost overruns and project losses in the downstream engineering, construction, fabrication, and plant maintenance operations. In addition, 4QFY22 earnings were weighed down by the rise in net interest expense by 5x to RM13mil.

• Malaysian operations remained the largest contributor with a 97% share to FY22 group pretax of RM550mil (-8% YoY), with the Middle East rising to 7% from 3% from heightened regional oil & gas activities at the Jubail supply base in Saudi Arabia.

• Despite the temporary setbacks in the downstream segment, we foresee gradual margin improvements along with the ramping-up of project completion as the group has factored in higher raw material costs into newly secured contracts in 2022. We are confident that Dialog, which has demonstrated savvy prudence during the pandemic, can safely navigate the current inflationary regime with further relaxation in foreign labour constraints.

• Over the longer term, the group still has ample acreage to double its Pengerang storage capacity with a remaining 500- acre zone of reclaimable land and the adjoining buffer zone.

• Dialog currently trades at an attractive CY23F PE of 22x, well below its 5-year mean of 31x. We believe Dialog deserves above-peer premium valuations given its long-term recurring cash flow-generating businesses which are further underpinned by the Pengerang development’s multi-year value re-rating bonanza and low net gearing levels.

Source: AmInvest Research - 19 Aug 2022