Dialog’s quarter three financial year 2023 core net profit of RM126 million was just 3% higher quarter-on-quarter, continuing from the flattish trend since the Jul-Sep 2020 quarter, when the onset of the pandemic caused manpower, raw material, and logistics costs to rise, further worsened by the early-2022 Russia-Ukraine war, said CGSCIMB in the recent Company Note.
Shipping and airfreight logistics costs have collapsed since mid-2022, and over the past year since pandemic lockdowns ended in Malaysia and Singapore, Dialog has been reporting a robust pick-up in downstream activities, such as engineering, procurement, construction and commissioning (EPCC), fabrication, and plant maintenance projects.
Despite these positives, Dialog’s quarterly profits have remained broadly static over the past 2½ years, and down 20% from its preCovid highs, due to continuing project losses from its legacy EPCC contracts, and poor margins on its existing 5-year Petronas plant maintenance contract that was signed in Jul 2019 at rates that are no longer compensating Dialog sufficiently for the higher manpower costs.
These cost pressures have offset rising profit contributions from Dialog’s independent tank terminals at PITSB and Langsat since Mar 2022, which was when utilisation and storage rates bottomed at 80% and S$5.50 cubic metres per month, respectively, before gradually rising to 95% and to above S$6 in Mar 2023.
The cost pressures have also offset additional profit contributions from Dialog’s 50% effective interest in a Thai onshore oil producer, POES, that was acquired in Aug 2022. POES had been contributing an average of RM21 million in after-tax profits to Dialog every quarter since quarter one financial year 2023.
Another factor curtailing Dialog’s quarterly profit growth has been the rising interest burden, with higher debt levels and higher floating interest rates both contributing to that trend.
“We continue to be positive on Dialog because the legacy EPCC and plant maintenance contracts will eventually run-off, the loss-making EPCC projects may take 9-12 months to complete, while the current plant maintenance contract with Petronas will expire in Jul 2024, which is just slightly over one year from today,” said CGSCIMB.
After the legacy contracts are completed, Dialog will definitely negotiate contracts that are more reflective of the current cost environment. Furthermore, petrochemical and refinery companies Rongsheng and ChemOne are working towards setting up new refineries at Pengerang, where Dialog will benefit via the provision of new tank terminal facilities and jetty usage at Dialog’s Pengerang Deepwater Terminal.
All the above are potential rerating catalysts. Unfortunately, investors will have to wait for some time for these catalysts to materialise. The key downside risk is for higher-than-expected project losses to weigh on profits.
