DIALOG has seen rising storage demand regionally and from downstream product importers in Australia and New Zealand.

Meanwhile, storage supply is tight in the absence of significant investment in recent years. Its EPCC margins should improve upon the completion of legacy contracts. We maintain our forecasts, TP of RM3.18 and OUTPERFORM call.

We came away from an engagement with DIALOG feeling positively upbeat on its earnings outlook. The key takeaways are as follows:

1. Upstream to be less dominant in FY25. DIALOG anticipates a shift in segmental PBT contributions in FY25 and beyond, with an expected increase in the prominence of the downstream division due to the improvements in project margins. In 3QFY24, the PBT breakdown was as follows: 40% upstream, 45% midstream, and 15% downstream. The upstream division gained prominence in FY24 due to more favourable oil prices YoY, while the downstream division, which includes specialist products and plant maintenance, saw a decline in earnings due to cost overruns.

2. Tank terminal demand to remain robust. DIALOG has seen rising storage demand regionally (due to a recovery in economic activity) and from downstream product importers in Australia and New Zealand (that need storage prior to shipment to the final destination). Meanwhile, storage supply is tight in the absence of significant investment in new storage capacity across Southeast Asia in recent years. As such, we anticipate the occupancy rate for DIALOG's independent tank terminals to remain strong at 90% or above in FY25.

3. Downstream business to see further margin improvement. Its EPCC margins should improve in coming quarters upon the completion of legacy contracts by end-FY24. Additionally, the new rates it has secured for its plant maintenance contracts should come through from FY25. Therefore, the recovery observed in 3QFY24 for its downstream segment is likely just the beginning, and we anticipate further improvements in FY25.

Forecasts. Maintained.

Valuations. We also maintain our SoP-based TP of RM3.18. 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.

Source: Kenanga Research - 15 May 2024