RAM Ratings has reaffirmed the respective AA2/Stable and A1/Stable ratings of DIALOG Group Berhad’s (DIALOG or the Group) RM3 billion Senior Islamic Medium-Term Notes and RM3 billion Subordinated Perpetual Islamic Notes.
The reaffirmation reflects expected recovery in the Group’s operating performance over the medium term, supported by its strong business positions in tank terminals in the midstream segment of the oil and gas industry, and engineering, procurement, construction and commissioning (EPCC) operations in the downstream segment. We expect DIALOG’s balance sheet and debt coverage to remain supportive of the ratings.
Despite the COVID-19 pandemic challenges, earnings from the midstream segment and the Group’s smaller operations in oilfield rejuvenation in the upstream segment stayed relatively stable. Its top and bottom lines for FY Jun 2021 however, markedly fell to RM1.61 billion and RM583.60 mil, respectively (FY Jun 2020: RM2.30 billion and RM747.28 mil), largely pulled down by the more cyclical downstream segment. The protracted pandemic significantly impacted the progress of its secured EPCC jobs, delaying the commencement of new projects. Supply chain disruptions triggered by the global contagion further contributed to a rise in raw material costs while closed borders pushed back the finalisation of projects.
In the face of the uncertainties, DIALOG has been prudent in evaluating and accepting contracts to safeguard its profit margin and reputation for timely delivery. We expect its operating performance to recover gradually. The lifting of restrictions would allow existing contracts to pick up the pace. The commencement of large projects in the Pengerang Integrated Petroleum Complex (PIPC) is also anticipated to benefit the Group in fiscal 2023.
DIALOG is a leader in the domestic tank terminals sector through its substantial ownership of and operating interests in Pengerang Deepwater Terminals (PDT), Tanjung Langsat Terminals and Kertih Terminals. Strategically located near O&G processing clusters, these terminals have been expanding, reaching a total capacity of about 5.0 mil cubic metres as of end-June 2021. PDT, with deepwater jetties that are unique in this region, has substantial growth potential in line with the needs of current and future O&G and petrochemical plants at the PIPC.
Its ratings remain anchored by stable earnings supported by long-term contracts, across the O&G industry value chain. Earnings from the midstream segment account for a big chunk of pre-tax profit and are relatively stable, backed by long-term lease contracts and steady operating costs. Growth in midstream earnings, coupled with the in-house EPCC of the terminals, has allowed DIALOG to weather the O&G downcycle in recent years as well as the impact of the COVID-19 outbreak. The Group provides a diverse range of services and products that are fairly well represented in the O&G value chain. It is vertically integrated where downstream EPCC and maintenance operations also service contracts are secured in the upstream and midstream segments.
Given DIALOG’s expansion in the midstream segment, total debts continued to climb, standing at RM2.21 billion as of end-June 2021 (end-June 2020: RM1.93 billion). Gearing however stayed robust at 0.45 times. As the Group maintains a large cash balance, net gearing was a similarly mild 0.15 times. Due to weaker earnings and cash flow generation in FY Jun 2021, funds from operations (FFO; including dividends received) debt coverage slipped to 0.26 times (FY Jun 2020: 0.33 times). DIALOG’s debts may increase to RM3.2 billion by the end-June 2024 to fund business growth. Its balance sheet will still be sturdy, with gearing and net gearing staying below 0.55 times and 0.4 times, respectively, as of the same date. FFO (including dividends) debt coverage may dip this year but should improve to above 0.30 times in fiscal 2023 and 2024.
DIALOG remains on the lookout for new investments to expand its upstream, midstream and downstream segments. We are cautious about rapid expansions, especially on multiple fronts and into new businesses, as these will elevate execution risk and expose the Group to unfamiliar hazards. DIALOG has yet to embark on a venture that meets its criteria, which underlines its financial prudence, risk aversion and measured approach to moving into new businesses. It will also find suitable partners that can share the requisite expertise and corresponding risks.
