KUALA LUMPUR (Dec 10): RAM Ratings has reaffirmed the AA2/Stable and A1/Stable ratings of Dialog Group Bhd’s RM3 billion senior Islamic medium-term notes and RM3 billion subordinated perpetual Islamic notes. 

The reaffirmation, the rating agency said, reflects an expected recovery in Dialog’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 its 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,” said RAM Ratings analysts Ben Inn and Thong Mun Wai in a statement.

They noted that the group’s earnings from the midstream segment and smaller operations in oilfield rejuvenation in the upstream segment had stayed relatively stable despite the Covid-19 pandemic.

However, Dialog’s revenue and pre-tax profit fell to RM1.61 billion and RM583.6 million for the financial year ended June 30, 2021 (FY21), from RM2.3 billion and RM747.28 million for FY20, largely pulled down by a 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 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 pace. The commencement of large projects in the Pengerang Integrated Petroleum Complex is also anticipated to benefit the group in fiscal [year] 2023,” the analysts wrote.

Noting that Dialog’s ratings remain anchored by stable earnings, supported by long-term contracts across the oil and gas value chain, RAM Ratings said the group’s strong midstream segment had allowed the group to weather the impact of the pandemic.

“Given Dialog’s expansion in the midstream segment, total debts continued to climb, standing at RM2.21 billion as at end-June 2021 (end-June 2020: RM1.93 billion). Gearing, however, stayed robust at 0.45 times. 

“As the group maintained a large cash balance, net gearing was a similarly mild 0.15 times. Due to weaker earnings and cash flow generation in FY21, funds from operations (FFO) (including dividends received) debt coverage slipped to 0.26 times (FY20: 0.33 times).

“Dialog’s debts may increase to RM3.2 billion by 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 at the same date. FFO (including dividends) debt coverage may dip this year but should improve to above 0.30 times in fiscal years 2023 and 2024,” the rating agency said.

However, RAM Ratings cautioned that “rapid expansion, especially on multiple fronts and into new businesses, will elevate execution risk and expose [Dialog] to unfamiliar hazards”.

The agency said despite Dialog’s ongoing lookout for new investments to expand its upstream, midstream and downstream segments, the oil and gas group had yet to invest in new businesses that do not meet its criteria, underlining its financial prudence, risk aversion and measured approach to moving into new businesses.

Shares in Dialog were down two sen at RM2.45 in afternoon trading, giving the group a market capitalisation of RM13.82 billion.