DIALOG's 1QFY25 results met our and consensus expectations.

Revenue fell YoY due to the absence of Jubail supply base contributions, but core profit improved on stronger performance from JV tank terminals. We expect its independent tank terminals to maintain robust spot rates in the near term, driven by sustained regional storage demand. DIALOG continues to trade at a significant discount with FY25 PER below 1SD of 5-year average.

We maintain our forecasts, TP of RM3.37 and OUTPERFORM call.

Its 1QFY25 core profit of RM151m came within our (24%) and consensus expectations (23%). The company announced final dividend per share (DPS) of 2.8 sen, above our previous full-year DPS forecast for the group.

YoY, DIALOG's 1QFY25 revenue fell 19%, impacted by weaker upstream revenue due to lower realised oil prices and reduced contributions from its international business. The pending divestment of its stake in the Jubail supply base resulted in no earnings contribution this quarter as its results were not consolidated.

Core earnings, however, rose 10% YoY, driven by stronger contributions from JV & associates, supported by higher tank terminal occupancy and spot terminal rates. Lower interest costs, and operating expenses also contributed to the YoY improvement. EBIT margin before JV & associates, however, has yet to normalise and remain largely similar YoY due to persistent supply chain issues.

QoQ, the group's top line declined, impacted by the divestment of the Jubail supply base. Core profit fell 6%, driven by weaker upstream performance and losses from its EPCC projects due to the persistent supply chain challenges. However, this was partially mitigated by stronger QoQ contributions from JV & associates, supported by higher tank occupancy and spot rates.

Outlook. Dialog's earnings are on an upward trajectory, driven by improved occupancy rates and spot rates at its independent tank terminals due to the sustained increase in demand regionally for storage. Additionally, the completion of legacy EPCC contracts that suffered from cost elevation should pave the way for better EPCC margins in the coming quarters.

Forecasts. Maintained.

Valuations. We maintain our SoP-based TP of RM3.37. 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.

Sum-of-Parts (SoP) Valuation RM m Valuation assumption Downstream business (EPCC and O&M) 2,664.9 Based on 9x PER Kertih Centralised Tankage Facilities (30%) 676.7 FCFF @ 7.7% discount rate Tanjung Langsat Terminals Facility 1 (100%) 1,638.7 FCFF @ 7.7% discount rate Pengerang Phase 1 (45.9%) 2,369.0 FCFF @ 7.7% discount rate Pengerang Phase 1 expansion (45.9%) 1,827.4 FCFF @ 7.7% discount rate Pengerang Phase 2 (25%) 4,779.8 FCFF @ 7.7% discount rate Pengerang Phase 3 (25%) 1,050.9 FCFF @ 7.7% discount rate Pengerang LNG 849.4 FCFF @ 7.7% discount rate Phase 3 land value (Pengerang) 479.6 Bayan PSC 1,847.3 D35/D21/J4 PSC 738.9 Expected net cash/(debt) 63.1 Total SoP 18,205.7 No of Shares 5,638.0

Source: Kenanga Research - 20 Nov 2024