Dialog faces continued margin squeeze

Higher project costs, labour among issues faced

“With the imminent ease of international travel restrictions in 2022, we see Dialog as a beneficiary as PDT will be able to welcome foreign clients and investors.” Hong Leong Investment Bank Research

PETALING JAYA: The profit margin pressure experienced by Dialog Group Bhd may persist in the near-term, despite the pick-up in business activities and market demand.

In view of the higher operating costs, some analysts have slashed their earnings forecasts for the oil and gas technical service provider.

RHB Research, for example, cut its earnings estimates for the financial years of 2022 to 2024 (FY22 to FY24) by 8% to 11%.

It said margins may remain under pressure for Dialog, no thanks to higher project costs as a result of higher labour, raw material and logistics costs amidst supply chain disruptions triggered by the Russia-ukraine war.

“Meanwhile, upstream earnings also accounted for a bigger portion, at over 20% of the first nine months of FY22 earnings, led by strong oil prices.

“Dialog guided that independent terminals are still operating at mid-80% utilisation rates.

“The monthly spot storage rates have weakened to mid-s$5 (RM15.86) and are expected to stabilise at current levels,” it said in a note yesterday.

CGS-CIMB Research, on the other hand, reduced the core earnings per share (EPS) forecasts for FY23 to FY24 by 11% to 12%.

This was due to higher-than-expected operating costs at Dialog’s various downstream businesses and lower tank terminal utilisation, which have more than offset the stronger oil prices.

The core EPS forecast for FY22 was also cut, albeit only by 2%, due to “various housekeeping matters.”

Despite the concerns on margins, analysts remain bullish on the Dialog stock.

Hong Leong Investment Bank (HLIB) Research sees Dialog as the only listed longterm secular growth stock in the local oil and gas space.

It also said that Dialog will continue to be one of the key beneficiaries of Pengerang’s development due to its exposure in tank terminals, engineering, procurement, construction and commissioning (EPCC) and maintenance services.

In addition to Dialog’s Terminals Langsat 1 and 2 with a total capacity of 650,000 m3, the Langsat 3 has terminal commenced full operations for its 120,000 m3 storage facility in Jan 2020.

Meanwhile, the 430,000m³ storage capacity under Phase 3A of Pengerang Deepwater Terminals (PDT) was commissioned in Feb 2021.

“With the imminent ease of international travel restrictions in 2022, we see Dialog as a beneficiary as PDT will be able to welcome foreign clients and investors, potentially boosting Dialog’s downstream EPCC and midstream take-or-pay tank terminals business.

“Valuation wise, Dialog is currently trading at FY23 price-to-earnings ratio of 27 times, which is at about 20% discount to its pre-pandemic mean of 32 times in 2019,” according to HLIB Research.

Commenting on Dialog’s financial performance in the third quarter ended March 31, HLIB Research said the core net profit was within its expectations but below consensus.

Kenanga Research also said that Dialog’s net profit of Rm389.8mil in 9M22 came in within its expectations.

On the results being below consensus expectations, Kenanga Research believes this could be due to consensus over optimism on the recovery of Dialog’s downstream activities.

“Similarly, Dialog announced an interim dividend of 1.3 sen per share is also within our expectation but below consensus,” it said.

Looking ahead, the brokerage said the further development of Pengerang will be a key catalyst for the group.

“With the soon expected start-up of Petronas’ Pengerang Integrated Complex, we believe this would help Dialog to expedite talks with potential partners.

“Dialog also has another 500 acres of land in the Pengerang area available for further developments for the longer term,” it said.

Kenanga Research expects the group’s longterm outlook to remain largely intact, with its midstream assets to also provide a degree of earnings defensiveness and resiliency.

It maintained its “outperform” view on Dialog, with an unchanged target price of RM3.30.