Dialog announced that it has entered into a Memorandum of Understanding (MoU) with Diyou Fibre (M) Sdn Bhd to outline an understanding between the parties to set up a special purpose vehicle to build, own and operate a food grade recycled polyethylene terephthalate (PET) pellets production facility. The venture will see the usage of recycled PET flakes as raw material to produce food grade recycled PET pellets for sale. We are positive over this development as this represents Dialog’s first investment into the downstream petrochemicals business, which is also part of its initiative to achieve business sustainability and to fulfil its environmental, social and governance (ESG) agenda. Pending further development from this MoU, we keep our forecasts unchanged. Our Outperform call on Dialog is maintained with an unchanged TP of RM3.86. We still like Dialog for its strong track record, defensive business model and steady recurring income generation from its tank terminal business.

• Diyou Fibre (M) Sdn Bhd (DFSB) is an established recycling and manufacturing company in Malaysia. The founders have more than 30 years of experience in the post-consumer plastics recycling industry. The company is one of the largest mechanical recycling manufacturers, where post-consumer plastics are recycled and made into materials used for polyester staple fibre, food and beverage packaging, industrial packing, construction, automotive and other raw materials in various industries, with operations throughout the whole of Malaysia. Its products are also exported to over 25 countries.

• Venturing into new business. The special purpose vehicle (SPV) is to build, own and operate a food grade recycled polyethylene terephthalate (PET) pellets production facility using recycled PET flakes as raw material to produce food grade recycled PET pellets for sale. It is understood that DFSB will supply recycled PET flakes to the SPV, with the latter having the first right to acquire the raw materials supply from DFMSB based on SPV’s demand. The SPV will then market and sell food grade recycled PET directly to food & beverages customers. The MoU between Dialog and DFSB will be based on 51:49 ratio.

• Our view. No further details are provided at this juncture such as the capacity of the facility, etc as feasibility studies are still on-going. Nevertheless, total investment is estimated to be around USD25m or ~RM106m with Dialog expected to finance this through internally generated funds and borrowings. This is not an issue for Dialog given its cash balance of RM1.7bn and net gearing of only 0.09x as of 3QFY21.
  
  While this development represents Dialog’s first investment into the downstream petrochemicals business as part of its initiatives to achieve business sustainability and to fulfil its ESG agenda, we see increasing demand for food grade recycled PET materials resulting from the drive by the international community to support a circular economy. The global recycled PET market size is expected to reach USD14.4bn by 2028, growing at a CAGR of 6.7%.
  
  The growing beverage industry in countries such as China, India, Japan, South Korea, Vietnam, and the Philippines is expected to drive the global recycled PET market over the period. In addition, rising concerns about the sustainability of natural resources in economies of North America and Europe are expected to have a positive influence on the product demand over the forecast period. According to European Union targets, plastic bottles in the EU will contain at least 30% recycled content by 2030. Meanwhile in UK, there will be an introduction of plastic packaging tax from April 2022 to manufacturers that do not contain at least 30% recycled plastic.

Source: PublicInvest Research - 12 Aug 2021