August 10, 2023 [Business Today]- Dialog Group Bhd (DIALOG)’s midstream tank terminal business is doing well, evident from high utilisation rates exceeding 90%.
“Additionally, spot rates for its independent terminals are currently robust, at above SGD6 per m3,” said Kenanga Research (Kenanga) in the recent Company Update Report.
In comparison, historical utilisation of DIALOG’s terminals typically ranges lower at 70%−80%. The surge in demand is partly driven by Australian and New Zealand oil importers that use DIALOG’s terminals in Pengerang.
To recap, following the pandemic, refining capacity in Australia more than halved given the closure of the Altona and Kwinana refineries.
Meanwhile, New Zealand’s sole refinery, Marsden Point 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.
“We understand that margins for downstream contracts have stabilised over the previous 2 quarters. This is mainly due to the progressive completion of legacy contracts that did not price in higher costs from the current inflationary environment,” said Kenanga.
To recap, in 2QFY21, DIALOG’s earnings before interest, tax, depreciation and amortisation margins peaked at 44% following the onset of the pandemic. Thereafter, quarterly margins tumbled consecutively until it troughed at 14% in 2QFY23.
This was attributed to 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.
“Nevertheless, DIALOG reassured that margins have now turned the corner. This is following the expected completion of older contracts by
end-FY24E,” said Kenanga.
For instance, the extension option on Petronas’ 5-year umbrella contract for plant turnaround and maintenance is due for exercise in CY24E. Moreover, for new contracts, DIALOG will incorporate higher pricing to reflect the current challenging environment.
DIALOG’s ambitious expansion plans in Pengerang and Tg Langsat remain on track. This is underpinned by the new O&G facilities at the Pengerang Energy Complex (PEC), and traction in demand for storage of sustainable products.
To recap, DIALOG plans to expand its midstream assets on its remaining landbank at Tanjung Langsat: 17 acres (200k m3), and Pengerang Phase 3: 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.
“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. Recall that Ronsheng committed to invest up to RM80b for a refining capacity in Pengerang,” said Kenanga.
Meanwhile, DIALOG is confident that it will be able to secure new customers to offtake capacity at Tanjung Langsat Terminal Phase 3.
This is given the robust demand for sustainable storage amidst limited market capacity. Recall that Phase 3 comprises storage facilities for low-carbon alternative fuels.
Moving forward, management alluded to the possibility of retrofitting its existing terminals in Tanjung Langsat Phase 1 & 2 to cater for sustainable fuels. Hence this would be positive for DIALOG’s ESG profile as well as margins. The latter is given higher tariffs for green storage vis-à-vis conventional tanks.
The research house maintains the Outperform rating with the Target Price of RM3.10.
Kenanga likes DIALOG due to its resilient non-cyclical earnings with multi-year growth prospects from future capacity expansion, active diversification into upstream production assets that enables the group to capitalise on oil price rallies, and the near-term earnings expansion from Tanjung Langsat Terminal Phase 3 that is targeted for completion by end-CY24.
Risks to Kenanga’s call include prolonged and intensifying cost pressures, delay in capacity expansion plans, and the reduced utilisation of tank terminals.
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