KEY INVESTMENT HIGHLIGHTS

• 1QFY25 normalised earnings up +23%yoy, within estimates
• Higher performance on the local front made up for the lower contribution from international businesses
• Lower but stable oil price supports midstream, but geopolitical risks remain for upstream and downstream
• Maintain BUY with TP: RM2.72

Maintain BUY, TP: RM2.72. Dialog Group Bhd (Dialog)'s 1QFY25 earnings came in within 24% of our yearly forecast for FY25. We maintain our BUY call and target price at RM2.72. 1QFY25 normalised PATAMI was up +23%yoy to RM160.1m. Conversely, 1QFY25 revenue slipped - 18.7%yoy to RM624.5m.

Midstream supporting 1QFY25 performance. 1QFY25's Malaysia operation remain robust across all divisions, despite lower overall revenue (-4.4%yoy to RM381.1m). The increased earnings (+41.2%yoy to RM147.1m) are due to higher tank storage occupancy and tariffs in the midstream business. Meanwhile, the upstream division remain sanguine; delivering strong production volumes, offset by lower oil prices (-8%yoy to USD79pb quarterly average). The downstream division continue to progress in completing EPCC and plant maintenance projects. The downside risks to the Malaysian front remain to be higher raw material prices and labour cost, as a result of: (i) geopolitical tensions, (ii) inflationary pressures, and (iii) supply chain disruption.

One-off DJSB divestment dragged performance. On the International front, 1QFY25 cumulative revenue slipped -34.4%yoy and cumulative earnings dropped -81.8%yoy to RM8.9m. This was due to reduced business activities. Additionally, Dialog had entered into an agreement to divest its entire 60% equity interest in Dialog Jubail Supply Base (DJSB) in Aug CY24. Pending completion, the results of DJSB were not consolidated in the 1QFY25.

Volatile oil market supports midstream development. With crude oil prices coming down close to CY23's average, (average YTD24:USD81pb, -1.2%yoy), amid the ongoing geopolitical tensions and inflationary pressures on raw material and labour costs. Nevertheless, we believe that the lower, yet stable oil price would benefit the group's storage farm business and support its current development of Pengerang Deepwater Terminals (PDT). This included the expansion of fabrication facilities in Pengerang with focus on providing services for the energy, chemical, pharmaceutical, solar and data centre industries. Additionally, Dialog's ongoing renewable storage initiatives in Dialog Terminals Langsat 3 (DTL3) are progressing as planned, with its second phase expected in CY26.

Positive FY25 prospects despite external risks. While the volatile oil market is expected to impact the upstream and downstream businesses, we noted that Dialog's services remain focused on the development and rejuvenation of existing oil and gas fields, as well as in exercising caution for lump-sum EPCC contracts amid potential downstream risks. The environment for the sector remains challenging, amid the market response to Trump's upcoming office, the ongoing geopolitical conflicts in the Middle East and Eastern Europe, as well as OPEC+ prolonged supply cut. However, we opine that Dialog's integrated operations across all divisions would continue to mitigate these risks, through continuous upskilling of workforce and intensive adaption of new digital technology. Barring any unforeseen global events, we maintain positive of Dialog's FY25 performance.

No changes to earnings estimates. In consideration of 1QFY25 earnings coming in within our expectations, we make no changes to our earnings forecast. As such, we maintain our BUY call with an unchanged target price of RM2.72. The target price is obtained by pegging a PER of 23x to the new EPS25 of 11.8sen.

Source: MIDF Research - 20 Nov 2024