DIALOG's 9MFY24 results beat expectations. Its 9MFY24 core net profit rose 16% YoY driven by lower operating and finance costs. Its earnings remain on an upward trajectory, underpinned by improving EPCC margins as cost pressures ease. We raise our FY24-25F net profit forecasts by 10% and 3%, respectively, lift our TP by 3% to RM3.18 (from RM3.10) and maintain our OUTPERFORM call.

Its 9MFY24 core profit of RM446m (excluding RM13.5m loss on disposal of other investment, RM1m disposal gain on PPE and RM3.2m forex gains) beat expectations, coming in at 85% and 77% of our full- year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from higher-than-expected operating margins at the plant maintenance and specialist product business segments. The company announced an interim dividend per share (DPS) of 1.5 sen, on track to meet our full-year forecast of 4.3 sen.

YoY, its 9MFY24 revenue inched up by 1% driven by enhanced upstream production and higher occupancy rates at its fully-owned Langsat Terminals. Internationally, its Jubail Supply Base also saw increased activities, along with higher sales of specialist products.

Its core earnings grew by a sharper 16% due to: (i) lower finance cost on reduced borrowings, and (ii) 3% decline in operating expenses on decreased cost pressures at its plant maintenance and specialist product operations as the global supply chain normalised.

QoQ, its top line declined 18% due to lower EPCC and plant maintenance revenue as several projects were already at the tail-end.

However, its core profit improved by 11% driven by: (i) a decline in finance cost; and (ii) an 18% drop in operating expenses on a more favourable cost environment for its non-tank terminal business.

Outlook. Dialog's earnings are on an upward trajectory, driven by improved occupancy rates at its Langsat terminals and enhanced performance in the upstream segment, notably in production. The company has also benefited from easing cost pressures. Additionally, the completion of legacy EPCC contracts suffered from cost elevation should pave the way for better EPCC margins in coming quarters.

Forecasts. We raise our FY24-25F earnings forecasts up by 10% and 3%, respectively, to account for lower operating expenses in its plant maintenance and specialist product businesses.

Valuations. Correspondingly, we lift our SoP-based TP by 3% to RM3.18 (from RM3.10). 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 - 14 May 2024