Decent performance despite challenges
? 9MFY6/22 core net profit was below expectations (72% of our and 66% of
consensus FY22F) due to higher opex and lower tank terminal utilisation.
? We cut our FY23-24F core EPS estimates by 11-12%, and reduce our SOP-based TP to RM2.77 on the back of higher cost of equity assumptions.
? Reiterate Add on Dialog’s long-term Pengerang growth potential (valued at
46 sen), with Dialog’s existing businesses valued at RM2.31.
3QFY22 flattish as EPCC cost challenges offset higher oil prices
3QFY22 core net profit of RM127m w as 3.2% lower yoy (but 0.9% higher qoq) due to
various factors that include cost pressure at its downstream EPCC business as a result of
Covid-19-related progress delays, high logistics costs, and commodity price inflation,
which have been recurring issues over the past six quarters, and which have caused
project cost overruns. The utilisation rates on Dialog’s non-industrial tank terminals
(PITSB and Langsat) probably weakened as oil stocks have been falling over the past
two years on a global level due to OPEC+ underproduction. These factors offset the uplift
from higher oil prices that likely benefitted its two producing oilfields and any contribution
from Langsat 3’s small 85k cbm capacity commissioned in late-CY21, as w ell as offset
higher downstream sales of specialist products and services, higher plant maintenance
work, and higher EPCC job volumes. In addition, Dialog’s interest burden rose as it
issued an additional RM500m in sukuk bonds in Jan 2022 at 4.53% p.a.
Quarterly earnings treading water for six quarters, but resilient
Nevertheless, Dialog’s quarterly core net profit has remained healthy over the past six
quarters, hovering within a tight range of RM119m to RM131m; this shows the resiliency
of its diversified business model across the up, mid and downstream segments. For
9MFY22, Dialog’s core net profit w as down only 3.2% yoy, despite the multiple
challenges during the Covid-19 pandemic. Dialog said it w as in discussions for the
reimbursement of project cost overruns with its clients; based on industry feedback, w e
think the probability of significant recovery is low , hence any recovery w ill be a bonus.
Reduce target price on higher cost of equity (Ke)
We cut our SOP-based TP from RM3.58 to RM2.77 to reflect the higher risk-free rate in
Malaysia, which rose over the past three months from 3.3% to 4.4%. As such, w e have
discounted future cashflows from Dialog’s existing tank terminal businesses at a higher
Ke of 8.6% (vs. 7.5% previously), keeping the target beta unchanged at 0.7. We now also
apply a higher beta of 1 (vs. 0.7 previously) to discount hypothetical cashflows from as-yet-unlaunched new Pengerang phases, resulting in a higher Ke of 10.4% (vs. 7.5%
previously). We have used a higher beta to value the future Pengerang growth to reflect
higher EPCC execution risks. Potential re-rating catalysts include new customers at the
Pengerang terminal area. Downside risks include the potential for further downdrift in
utilisation at PITSB and Langsat terminals, and the snow balling of cost overruns and
project delays at its EPCC and fabrication businesses.