Dialog’s (DLG MK) 1QFY24 results are in line, with core earnings strengthening by 6% YoY, backed by a ramp-up in its international operations.
RHB Malaysia Result Review today (Nov 15) cited that they still expect Dialog to deliver 4-11% YoY earnings growth in FY24-26, on margin improvements.
The stock is trading at 23x FY24F P/E, which is around -1SD from its 5-year mean of 27x.
RHB recommends a BUY call with a new TP of MYR2.79 from MYR2.85, 32% upside with c.2% FY24F (Jun) yield.
Results within expectations
At 25% and 24% of RHB’s and Street full-year estimates, 1QFY24 core earnings of MYR138m (+19% QoQ; +6% YoY) are within expectations.
No dividend was declared, as expected
1QFY24 core earnings grew 19% QoQ to MYR138m after stripping off items that include a MYR8m fair value loss on other investments, and MYR2m in FX gains.
Revenue improved 13% QoQ while EBITDA rose 20% QoQ on a better product mix. The better performance was further anchored by a better JV & associates’ contribution (+14% QoQ), stronger storage terminal contribution masking weaker Pan Orient Energy Corp numbers).
YoY, core earnings also strengthened by 6% due to stronger profits from its international operations – these, in turn, stemmed from higher specialist products and services revenue, a pick-up in EPC and plant maintenance activities in Singapore and New Zealand, as well as higher tank terminal contribution.
Outlook
RHB expects downstream activities to remain robust in terms of engineering, construction and plant maintenance, and see an improved outlook for the fabrication and specialty products arm.
Cost challenges and margin pressures are likely to persist in the near term, but they expect margins to improve YoY in the coming quarters following the tail-end of certain legacy projects.
Occupancy levels and monthly storage rates for independent terminals are still well sustained, at above 90% and above SGD6/cbm.
RHB is also positive on the recently announced expansion plan for its jointly-owned fabrication facilities in Pengerang with an investment value of MYR250m. It is expected to be completed by 1Q25, and has an annual revenue target of MYR300m.
Meanwhile, Dialog’s maiden venture into specialty chemicals production could further diversify its earnings base – but earnings from this business could be rather volatile, depending on product spreads.
RHB was guided that the project’s IRR could be in double digits at least, with a payback period expected within 10 years.
Still a BUY
While RHB maintains their estimates, their SOP-based TP dropped to MYR2.79. The TP also includes a higher 6% ESG discount, based on a revised ESG score of 2.7 (from 2.8 previously) as a result of another year of increase in its total Scope 1 and 2 emissions in FY23.
Downside risks: Weaker tank terminal rates and the slower-than-expected expansion of Pengerang Phase 3.
Outlook Brightens as Cost Eases
Meanwhile, the Results Note by Kenanga Research today cited that Dialog’s 1QFY23 results met expectations as quarterly earnings improved QoQ and YoY, driven by a stronger top line, better gross margin as well as higher JV earnings on increased storage tank utilisation.
Kenanga remains positive over its near-term earnings outlook underpinned largely by easing cost pressures. Kenanga maintains their forecasts with a TP of RM3.10 and OUTPERFORM call.
1QFY24 within expectations
Its 1QFY24 core profit of RM137.9m (after excluding EI of RM7.7m loss of other investments and RM2m forex gain) met expectations at 25% of both our full-year forecast and the full-year consensus estimate. No dividends were declared for the quarter.
YoY earnings growth driven by international business and JV. YoY, its 1QFY24 top line grew 9.7% due to higher revenue from specialist products & services in various countries as well as the ramp-up in activities at Jubail Supply base, coupled with higher billings from EPCC work jobs in Singapore and New Zealand.
However, its core earnings only grew 6.2% YoY weighed down by higher interest costs (+16.9% YoY), partially cushioned by an 11.7% improvement in JV profits due to higher utilisation rate at its tank storage facilities.
QoQ earnings growth driven by JV and core businesses. QoQ, its top line grew 13.1% due to a pick-up in activities for its core businesses (plant maintenance, specialist products). Correspondingly, its net profit rose by a larger 15.2% driven by stronger JV contributions (+14.5%).
Kenanga noticed that its OPEX increased at a slower pace as compared to top line, an early sign of supply-chain cost pressures easing.
Recovery emerging
After flattish showing in FY23, Dialog’s independent terminals are showing growth in FY24 with utilisation seen to be ramping back up slightly in the latest quarter. For its core business portfolio, there have been signs of cost pressure easing and Kenanga believes the gradual ramp-up in activities (both upstream and downstream) will result in improved gross margins in the near to medium term.
On the other hand, DIALOG still owns 500 acres of land for longer-term development in Pengerang.
Forecasts – Maintained
Kenanga also keeps their TP of RM3.10 based on Sum-of-Parts valuation. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by the research house.
Kenanga continues to like DIALOG for: (i) the resilient earnings from its non-cyclical businesses such as operation of storage facilities and plant maintenance, (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.
Kenanga makes an OUTPERFORM call with risks to include: (i) prolonged and intensifying cost pressures, (ii) delay in capacity expansion plans, and (iii) reduced utilisation of tank terminals.
