The development of Pengerang, Johor, into the home of a major integrated petrochemical complex in Asia over the last decade has benefited Dialog Group Bhd, which is one of the facility’s largest investors.
Over the last three financial years to end-June 2021, Dialog’s risk-weighted profit after tax (PAT) had grown at a compound annual growth rate (CAGR) of 2.1%, from RM510.4 million in the financial year ended June 30, 2018 (FY2018) to RM543.1 million in FY2021.
While in the low single digits, the performance still put Dialog ahead of its peers during the awards evaluation period — enough to make it the winner of this year’s The Edge Billion Ringgit Club award for the highest growth in PAT over three years in the energy sector.
Had it not been for the Covid-19 pandemic, which caused supply chain disruptions, and the Russia-Ukraine conflict that led to higher raw material costs, Dialog would have earned more and chalked up a higher CAGR during the period.
Despite the conflict in Ukraine as well as the disrupted supply chain that had impacted its engineering, procurement, construction and commissioning (EPCC) business, Dialog continued to be profitable in FY2022, albeit on a lower level. In FY2022, it recorded a PAT of RM505.9 million, which was 6.8% lower than in the preceding financial year.
Nevertheless, analysts covering the stock opine that the company will continue to enjoy the fruits of the development of Pengerang for many years to come. Its expansion and diversification into the upstream oil and gas sector as well as sustainable businesses also bode well for Dialog.
“Dialog will continue to be one of the key beneficiaries of Pengerang’s development due to its exposure to tank terminals, EPCC and maintenance services,” says Hong Leong Investment Bank Research analyst Jeremie Yap in an Aug 19 note.
In the note, Jeremie points out that with the easing of international travel restrictions in FY2023, Dialog will be able to welcome foreign clients and investors, potentially boosting the company’s downstream EPCC and midstream take-or-pay tank terminal business.
“Also, Dialog is taking various measures, including negotiating with clients for reimbursement and compensation for project overruns caused by inflationary pressures and external macroeconomic factors,” he adds.
Dialog’s FY2022 profit was negatively affected by cost provisions for two EPCC projects in Singapore, owing to cost escalations brought about by Covid-19-induced supply chain disruptions as well as the Russia-Ukraine war.
However, these projects are at their tail end and, from January 2023 onwards, Dialog will no longer be afflicted by cost overruns at what CGS-CIMB Securities Research analyst Raymond Yap deems as the company’s two “most problematic projects”.
Cost pressures in the EPCC business contributed to the loss before tax of RM36.4 million for Dialog’s Asia segment in FY2022, compared with a profit before tax of RM20.36 million in FY2021.
“At the moment, Dialog is concentrating on completing its existing EPCC jobs and is not bidding aggressively for new EPCC work. Potential good news is that Dialog will negotiate for cost overruns compensation soon and hopes to secure some compensation in CY2023,” Raymond says in the report.
Putting the challenges at its downstream business aside, Dialog is making progress in its upstream business through the acquisition of the entire equity interest in Pan Orient Energy Corp, a company listed on Canada’s TSX Venture Exchange.
Pan Orient Energy, through its wholly-owned subsidiary Pan Orient Petroleum Pte Ltd, holds 50.01% equity interest in Pan Orient Energy (Siam) Ltd (POES), which is the concessionaire and operator of Concession L53/48, onshore Thailand. The acquisition, at a cash consideration of about RM170 million, was completed on Aug 25.
As the concessionaire and operator of Concession L53/48, POES produced about 2,700 barrels of oil per day (bopd) from seven onshore producing oil fields in Thailand in 2021. POES had 2P (proven and probable) oil reserves of 4.6 million barrels as at Dec 31, 2021.
CGS-CIMB’s Raymond says Dialog is expected to book nine months’ worth of results from POES in the July to September 2022F quarter (1QFY2023F) and 18 months’ worth of results in FY2023F, which may lift the group’s 1QFY2023 quarterly profit by 41% and FY2023F earnings by 17%.
At the time of writing, CGS-CIMB had an “add” call on Dialog, with a target price of RM2.63 per share, while HLIB Research had a “buy” call and a target price of RM3. Kenanga Research had an “outperform” call on the stock, with a target price of RM3.10, while RHB Research had a “buy” call and a target price of RM2.96.