DIALOG’s FY22 results came in slightly below expectations, dragged down by higher project costs for its downstream operations. Going forward, we believe the group’s long-term prospects remain largely intact, with further development on Pengerang Phase 3 to act as potential re-rating catalyst. We cut our FY23F earnings by 13%, while introducing FY24F numbers. Likewise, our SOP-derived TP is also lowered by 6% to RM3.10 (from RM3.30). Maintain OUTPERFORM.

FY22 results below expectations. FY22 core net profit of RM508m missed our forecast and the consensus estimates by 6% and 7%, respectively. The variance against our forecast came largely from higher project costs in its downstream operations.

Overall weaker earnings. FY22 core earnings slipped 4% YoY, dragged down by higher project costs in its downstream operations. As we understand, the group is currently in the midst of discussions with clients for potential reimbursements and compensations for these cost overruns. The weaker earnings were partially offset by higher associates’ contribution, as last year saw an expense recognition for deferred tax liability from its Pengerang Phase 2 assets.

Further development of Pengerang a key catalyst. Looking ahead, further development of Pengerang Phase 3 will be DIALOG’s key focus. Phase 3 is designated for dedicated terminals serving mid-to-long-term clients. With the start-up of Petronas’ Pengerang Integrated Complex (PIC), we believe this would help DIALOG to expedite talks with potential partners. DIALOG also has another 500 acres of land in the Pengerang area available for further developments for the longer term. Meanwhile, with the current expansion of its Langsat Terminals completed, DIALOG still has another 17 acres of land in Langsat, which could potentially add another 200k cubic meters of storage capacity in the future – thus bringing Langsat’s total capacity to ~1m cubic meters.

Forecasts. We cut our FY23F forecast by 13% to account for weaker downstream margin, and introduce FY24F numbers.

Maintain OUTPERFORM with a 6% lower SOP-derived TP of RM3.10 (from RM3.30) following the earnings cut. There is no change to our valuation based on ESG for which it is given a 3-star rating as appraised by us (see Page 4).

Overall, despite the short-term challenges, the group’s long-term outlook remains largely intact, with its mid-stream assets to also provide a degree of earnings defensiveness and resiliency. That said, any further development of its Pengerang phase 3 is expected to serve as potential re-rating catalyst for the stock.

Risks to our call include: (i) lower utilisations of its tank terminals, (ii) slowdown in downstream jobs flow, and (iii) delay in the development of Pengerang Phase 3.

Source: Kenanga Research - 19 Aug 2022