DIALOG is expanding its storage capacity at Langsat Terminal 3 (DTL3) by an additional 150,000m³, of which two thirds will be dedicated to renewable products, and the balance for petroleum products. We estimate that the latest investment will add RM0.05/share to its valuation. We maintain our forecasts but upgrade our TP by 2% to RM3.23 (from RM3.18). Maintain OUTPERFORM.

DIALOG announced that it will be expanding its storage facilities at Langsat Terminal 3 (DTL3) in Tanjung Langsat, Johor, by adding 150,000m3 of storage capacity for renewable and petroleum products. The first 100,000m3 is dedicated to EcoCeres Limited, a subsidiary of EcoCeres Inc., while the remaining 50,000m³ is expected to be leased to third-party customers such as multinational companies and trading houses. The expansion is expected to be completed in 1QFY27.

DTL3 secured a take-or-pay storage agreement with EcoCeres Limited for the dedicated 100,000m3 of storage, which serves as a catalyst for the expansion of the terminal. This agreement follows EcoCeres’ announcement of a significant investment in a new production facility in Pasir Gudang, Johor Darul Ta'zim, Malaysia. The new biorefinery, expected to be operational in 2HCY25, is strategically located less than 1km from DTL3 and will have a direct connection to DTL3’s storage tanks via rundown pipelines.

Based on a tank terminal rate assumption of SGD7/month/m3, we estimate that the new storage facility expansion will bring a recurring PAT of RM18m per annum to the group based on 90% utilisation. With a WACC assumption of 7.7%, the announced expansion will result in an estimated RM0.05/share accretion to the group’s SoP valuation. This is a significant win for the group, as rates are more favourable for dedicated terminals. Additionally, the storage of renewable products like sustainable aviation fuel (SAF) and hydrotreated vegetable oil (HVO) dedicated for EcoCeres enhances DIALOG's ESG portfolio.

Forecasts. Maintained.

Valuations. We upgrade our SoP-TP by 2% to RM3.23 from RM3.18 after imputing the DCF valuation from the announced expansion. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to like DIALOG for: (i) margin recovery at its plant maintenance, EPCC and specialist product businesses, (ii) its earnings growth and diversification driven by the forays into upstream investments, including production assets (its current portfolio of Production Sharing Contracts includes Baram Junior Cluster, D35/D21/J4 and Concession L53/48 in Thailand), and (iii) its strong track record in project execution. Maintain OUTPERFORM.

Risks to our call include: (i) prolonged and intensifying cost pressures, (ii) delay in capacity expansion plans, and (iii) reduced utilisation of tank terminals.

Source: Kenanga Research - 31 Jul 2024