We revise our call on Dialog to TRADING BUY (from HOLD previously). The Group reported 2QFY25 headline losses as management embarked on a kitchen sinking exercise. However, after accounting for impairments, core earnings were still a miss due to EPCC and renewables business. Moving forward, we expect earnings to normalise as external projects nears completion. We see trading opportunities for the stock premised on earnings recovery and capped downside risks as Dialog now trades at a low of 16x or close to -2 SD to its 5-year average PE of 19.3x. Hence, we raise our target price (TP) to RM2.15/share (from RM2.00/share previously) based on a higher target CY26 PE of 19.3x.

• EPCC loss pushes earnings close to half of forecasts. The Group reported a core net profit (CNP) of RM23mil (-86% QoQ, 84% YoY), after excluding for: (a) PPE write-off for the malic acid plant in Gebeng, Kuantan (RM91mil) and (b) impairment of investment for the food grade recycled polyethylene terephthalate pellets (rPET) plant in Pajam, Negeri Sembilan (RM44mil) and (c) unrealised FX losses. The results represented only 28%-29% of ours and consensus forecasts as losses from the EPCC segment due to higher costs during the commissioning stages and lower demand from the rPET venture dragged Dialog's performance.
• Revise TP upwards on higher PE multiple. We revise our earnings downwards for FY25 by 20% to account for the losses. Moving forward, we expect earnings to normalise as external EPCC projects approaches completion by June 2025 and the rPET plant closes down operations. Furthermore, we do not see external EPCC projects dragging performance as Dialog will likely not pursue new external projects due to a low margin environment. Backed by the recovery, we raise our TP to RM2.15/share (from RM2.00/share) based on a higher target CY26 PE of 19.3x (from 18x), or at par to its 5-year average.
• Negative sentiment capped on minimal downside risks to headline numbers moving forward. Despite the impact, we view the kitchen sinking exercise as timely particularly on discontinuation of the malic acid plant as spot prices in has declined by 20-30% due to an oversupply situation in the region, according to management. Additionally, we do not see further impairments from the rPET plant as the Group's 51% JV- share of book cost is now close to zero based on our estimates. Recall, the plant has a construction cost of RM106mil and had already incurred an impairment of RM22.5mil in FY24.
• Near term play on recovery thesis and flow of incremental catalysts. Management continues to report stable performance for its core businesses in the upstream and midstream division which will anchor earnings performance. In the near term, we expect to see positive newsflows to support share price performance from the following, commencement of operations from: (a) expansion of Morimatsu-Dialog fabrication facilities and 24k m3 renewable fuel tanks in Tanjung Langsat by 3QFY25 and (b) new award for a biorefinery tank terminal in Pengerang.

Source: AmInvest Research - 14 Feb 2025