KUALA LUMPUR (Aug 9): Kenanga Research has kept its outperform call on Dialog Group Bhd as it expects a gradual recovery in the group’s earnings before interest, taxes, depreciation and amortisation (Ebitda) margins, and midstream utilisation rates of 90%.
The research house in a note on Wednesday (Aug 9), citing the take-aways from a meeting with Dialog recently, said Dialog’s midstream tank terminal business currently a high utilisation rate exceeding 90%, compared to 70-80% historicallly, and spot rates for its independent terminals above SGD6 per cu m.
"The surge in demand is partly driven by Australian and New Zealand oil importers that use Dialog’s terminals in Pengerang,” said the research firm.
To recap, following the pandemic, refining capacity in Australia more than halved given the closure of the Altona (capacity: 90,000 barrels per day [bpd]) and Kwinana (138,000 bpd) refineries.
Meanwhile, New Zealand’s sole refinery, Marsden Point (96,000 bpd) was converted into an import terminal in 2021. Hence to narrow the supply gap, imports of refined oil products into both countries have been ramped up.
“This, in turn, benefits Dialog as traders utilise its storage tanks for fuel products bound for Australasia,” said Kenanga.
The research house said Dialog’s downstream margins are expected to gradually inch up following the stablisation of contracts over the previous two quarters mainly due to the progressive completion of legacy contracts that did not price in higher costs from the current inflationary environment.
In 2QFY2021, Kenanga noted that Dialog’s Ebitda margins peaked at 44% following the onset of the pandemic, but tumbled consecutively until it troughed at 14% in 2QFY2023, after operations at Dialog’s customers and suppliers derailed by the pandemic, and global supply chain gridlocks caused by the Ukraine-Russia conflict.
“As a result, this had led to cost overruns and project losses due to higher material price and labour costs, and delays emanating from manpower constraints,” said Kenanga.
Nevertheless, Dialog guided that margins have now turned the corner following the expected completion of older contracts by end-FY2024, for example the extension option on Petronas’ five-year umbrella contract for plant turnaround and maintenance is due for exercise by next year end.
Moreover, for new contracts, Kenanga expects Dialog to incorporate higher pricing to reflect the current challenging environment.
Meanwhile, the research house noted that Dialog’s ambitious expansion plans in Pengerang and Tanjung Langsat remain on track, underpinned by new oil and gas (O&G) facilities at the Pengerang Energy Complex (PEC), and (ii)traction in demand for storage of sustainable products.
To recap, Dialog plans to expand its midstream assets on its remaining landbank at Tanjung Langsat, spanning 17 acres and Pengerang Phase 3, involving some 500 acres.
“The group is currently courting customers to enter into long-term (at least 10 years) offtake agreements for dedicated storage in Pengerang. They include existing client, BP Singapore, new investors at the PEC, or international energy traders (eg Vitol, Trafigura, Vopak),” said Kenanga.
“As such, we believe there will be potential interest from new investors at the PEC. They include Singapore-based ChemOne and China-based Rongsheng Petrochemical,” said the house.
The report noted that Ronsheng is committed to invest up to RM80 billion for a refining capacity in Pengerang while, ChemOne targets to launch its US$4 billion (RM18 billion) project at the PEC (completion mid-2026) to produce oil products and petrochemicals.
Meanwhile, Kenanga said Dialog is confident that it will be able to secure new customers to offtake capacity at Tanjung Langsat Terminal Phase 3 given, the robust demand for sustainable storage amidst limited market capacity.
At the time of writing, Dialog was unchanged at RM2.22, valuing the company at RM12.5 billion.