Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on August 30, 2021 - September 5, 2021

THE share price of Dialog Group Bhd, an oil and gas player involved in oil and gas storage and terminal facilities as well as upstream businesses, rebounded on Aug 6 from its lowest level since Feb 8, 2018.

It traded hesitantly, however, before touching RM2.78 last Thursday, 9% higher than the RM2.55 trough it hit on Aug 6.

Could the rebound be due to its announcement last Friday of a joint venture with Morimatsu Technology  Service Co (MTS) to provide one-stop engineering and fabrication services of critical process equipment, pressure vessels and modular plant/facility solutions from Dialog’s facility in Pengerang?

Dialog closed at RM2.69 last Friday.

Be that as it may, can the recent rise in Dialog’s share price be sustained over a longer period to breach the RM3 level that it last traded at on June 18? From there, can it breach the RM3.25 that the counter was last traded at on March 18?

Of the 16 analysts who cover Dialog, all but one have “buy” calls on it. Most of the calls have been unchanged since three months ago (although some target prices were revised lower), when Dialog’s share price was hovering between RM2.85 and RM3.03.

Despite analysts’ optimism, even from three months ago, Dialog’s share price has only recently staged a recovery. This could be because investors were still waiting for the group’s fourth-quarter and full-year earnings results, which were announced on Aug 19.

Over the last five months, Dialog has released two quarterly financial results. On May 19, it released its financials for the third quarter ended March 31, 2021 (3QFY2021), which saw its revenue fall 19.8% year on year, while net profit fell 9.9% to RM136.17 million.

Then, on Aug 19, Dialog reported its numbers for the fourth quarter, which saw the group’s revenue slip a marginal 3.3% y-o-y to RM522.14 million, indicating a recovery. However, its net profit fell a deeper 11.6% y-o-y during the quarter to RM138.54 million.

The declining profit could be the reason investors did not warm up towards Dialog initially. However, with its full-year financials released and its share price falling to more than three-year lows, investors are noticing the counter again.

According to Alex Goh, an analyst with AmInvestment Bank, the full-year contribution from the additional capacities from Dialog Pengerang Phase 5 and Tanjung Langsat 3 terminal by year-end are likely to drive the group’s earnings growth trajectory in FY2022F.

Following those two developments, Dialog still has ample acreage to double its Pengerang storage capacity, with a remaining 500-acre zone comprising reclaimable land and the adjoining buffer zone, says Goh in the Aug 20 report.

He ascribes a “buy” call on Dialog, with a target price of RM3.80 per share. In the report, he says Dialog is currently trading at 22 times FY2022F earnings, well below its five-year peak of around 40 times.

“Dialog deserves above-peer premium valuations, given its long-term recurring cash-flow generating businesses, which are further underpinned by the Pengerang development’s multi-year value re-rating bonanza and low net gearing levels,” says Goh in the report.

Nevertheless, Dialog could do better at attracting investors if it declared bigger dividends. Its dividend yield has hovered in the range of only 0.8% to 1.6% over the last 10 years, which is hardly attractive for investors searching for dividends.

Analysts who cover Dialog believe it has a lot of growth potential, judging from their target prices. Of the 16 analysts, Maybank Investment Bank Research has the highest target price of RM4.90, while the lowest, at RM3.09, comes from Sadif Investment Ana­lytics.

The consensus target price works out to RM3.79, or a 40% upside from last Friday’s close of RM2.69.

Upstream far from supplementing storage and terminal business

While Dialog has a lot of growth potential in the storage and terminal facilities business, it is still struggling to find good assets in the upstream sector. This has resulted in the segment’s inability to balance out the volatility of the midstream and downstream businesses.

In November 2019, Dialog’s largest shareholder and executive chairman Tan Sri Dr Ngau Boon Keat said the group aimed to grow its upstream business to account for at least one-third of its net profit from the then 20% level.

It is not known how much the upstream business contributed to Dialog’s net profit in FY2021 ended June 30 because it reports its financial performance based on the markets that it is in, rather than the type of businesses or segments.

A Dialog executive tells The Edge, however, that it is difficult to find good assets that match the group’s risk and return appetites. Therefore, the investments in upstream assets are much slower than the group would like it to be.

“The completion of Phase 3A of the Pengerang Deepwater Terminal (PDT), while good for our recurring incomes, also means that our construction revenue from that phase has ended. With downstream revenue declining and upstream not yet able to supplement the decline, our overall revenue declined,” says the exe­cutive, who is not authorised to speak to the media.

During the year, Dialog completed the 430,000 cu m storage capacity under Phase 3A of PDT in March as scheduled. The group is also on track to completing the 85,000 cu m capacity expansion at Dialog Terminals Langsat 3 by year-end.

In FY2021, Dialog’s revenue fell 30% y-o-y to RM1.61 billion, while profit before tax fell 20.4% y-o-y to RM595 million. Its net profit fell 12.3% y-o-y to RM543 million.

In the upstream segment, the only notable investment made by Dialog this year was the acquisition of a 5% interest in Halliburton Bayan Petroleum Sdn Bhd (HBP) for a total cash consideration of US$1.8 million (RM7.48 million).

Pursuant to that, HBP is now a wholly-owned subsidiary of Dialog, and its name has been changed to Dialog Bayan Petroleum Sdn Bhd. In 2019, Dialog acquired a 45% stake in HBP from its joint-venture partner Halliburton International Inc.

HBP is the independent technical service contractor for the oilfield services contract (OSC) entered into with Petronas Carigali Sdn Bhd (PCSB) to provide contractor services to enhance recoverable reserves from the Bayan Field, located offshore Bintulu, Sarawak, with a term of 24 years (up to 2036).

In addition, in FY2020, Dialog continued to implement its production enhancement and development initiatives on both the OSC and the D35/J4/D21 production sharing contract (PSC) that it holds.

According to Dialog’s 2020 annual report, the redevelopment drilling programmes in the OSC and PSC were executed both efficiently and safely during the year, and the wells drilled are expected to enhance production from these fields significantly.

It says: “Oil price volatility will continue to influence the performance of our upstream assets and we have been monitoring global developments closely. We have taken proactive steps in collaboration with our partners to mitigate its impact.

“These include cost optimisation and cash flow management initiatives, and the ongoing review of capital and operational expenditures.”

 

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