Overview of Dialog Group Bhd

Dialog Group Bhd (Bloomberg ticker: DLG MK), an established player in Malaysia’s energy sector, specializes in engineering, procurement, construction, and commissioning (EPCC) services, plant maintenance, and tank terminal operations. The company also markets specialty chemicals and equipment, further diversifying its portfolio within the energy value chain.

The company’s share price, as of the report, stands at RM1.90 with a target price of RM3.00, indicating a promising upside of 57.9%. Major shareholders include Ngau Boon Keat (18.3%), the Employees Provident Fund (EPF) (16.2%), and Azam Utama (7.6%).

Key Developments: LNG-Air Separation Unit (ASU) Plant

Dialog Group is making waves with its involvement in Malaysia’s first LNG-driven Air Separation Unit (ASU) plant in Pengerang, Johor. This project, spearheaded by Petronas Gas (PGAS), represents a technological leap in sustainable energy. The ASU plant aims to reduce electricity consumption by 25% and cut carbon emissions by 15,000 tonnes annually compared to traditional ASU plants.

The plant, with a combined capacity of 612 tonnes per day, has an EPCC cost of RM368 million and a targeted commercial operation date (COD) of November 2026. Dialog holds a 27.8% stake in this project, investing RM37 million in equity based on a debt/equity ratio of 70/30. Its total EPCC cost share is RM102 million, with an estimated overall capex of RM443 million.

Under a Design, Build, and Lease (DBL) model, the ASU will be leased to a gas operator for a 25-year period, with shareholders receiving fixed monthly facility charges.

Separation from PLNG2 Project

This ASU project is entirely distinct from Dialog’s involvement in the PLNG2 project. While the PLNG2 initiative, valued at RM2.7 billion, focuses on LNG regasification with a capacity of 3.5 million tonnes per annum (MTPA), the ASU marks a new strategic collaboration between Dialog and PGAS. The PLNG2 project, an associate company with Dialog holding a 25% stake, generated earnings of RM47-86 million annually for Dialog since its commercial operations began in November 2017.

Financial Performance and Projections

The ASU project’s earnings contribution to Dialog is expected to be minor, ranging from RM5-10 million annually, which constitutes about 1% of the group’s earnings base. However, the project aligns with Dialog’s environmental, social, and governance (ESG) goals, enhancing its emission reduction profile.

Dialog’s financial highlights for FY2023-2027 include:

• Net turnover: RM3,002 million (2023) to RM2,998 million (2027).
• EBITDA: RM506 million (2023) to RM878 million (2027).
• Net profit: RM511 million (2023) to RM685 million (2027).
• Dividend yield: 1.5% (2023) to 2.2% (2027).

Despite relatively flat revenue growth, Dialog’s net margin is projected to improve steadily, reaching 23.6% by 2027.

Potential Catalysts for Future Growth

The ASU project could pave the way for further LNG-related initiatives in Malaysia. Industry channel checks suggest feasibility studies for a new LNG terminal are underway, possibly spearheaded by Aramco in Pengerang. This aligns with Aramco’s ambition to dominate the global LNG market, especially following its acquisition of US-based MidOcean Energy in 2023 and gaining access to Australian LNG facilities in 2024.

Additionally, Dialog has ventured into renewable energy storage with the completion of Terminal Langsat 3 (DTL3), a 24,000 cubic meter facility, which is undergoing commissioning for commercial operations in 2QFY25.

Stock Valuation and Recommendation

UOB Kay Hian maintains a “BUY” recommendation for Dialog Group Bhd with a target price of RM3.00. The stock is deemed attractive based on its risk-reward profile, with limited downside risks and significant upside potential from future projects. Dialog’s ability to diversify its EPCC commitments and focus on resilient projects strengthens its position in the market.

The valuation breakdown includes:

• Core business: 18x P/E on net profit (ex-associates), valued at RM1.13/share.
• Pengerang Phase 1 & 2 upgrades and expansion potential: RM1.72/share.
• Net debt adjustment: RM0.16/share.
• Total Sum-of-the-Parts (SOTP) valuation: RM3.00/share.

Environmental, Social, and Governance (ESG) Highlights

Dialog Group’s commitment to ESG is evident through various initiatives:

• Environmental: Carbon emissions increased to 17,326 tCO2e in FY23, but the company is actively pursuing sustainability goals.
• Social: Female representation in management rose to 21% in FY23, and over RM440 million has been donated through the MyKasih foundation.
• Governance: Five out of nine board members are independent, ensuring diverse and effective oversight.