New venture to diversify Dialog’s income base
27 Sep 2023
It is estimated that the new venture could deliver an internal rate of return (IRR) in double digits for the integrated technical service provider to the energy sector, with a payback period of within 10 years, according to RHB Research, citing management’s guidance.
“Overall, we are positive on Dialog’s maiden venture into specialty chemicals production to further diversify its earnings base, although earnings from this business could be rather volatile, depending on product spreads,” the brokerage wrote in its report.
“We were guided that the project’s IRR could be in double digits at least, with a payback period expected within 10 years,” it added.
Dialog on Monday announced that it would build, own and operate a specialty chemical plant producing malic acid in Gebeng, Pahang, with an annual capacity of 12,000 tonnes. Malic acid is a chemical that is mainly used as an additive in the food and beverage industry.
The plant was targeted to be completed in the second quarter of 2026 (2Q26).
RHB Research maintained “buy” on Dialog, with an unchanged sum-of-parts (SOP)-based target price of RM2.85.
It said: “We maintain our earnings estimates, as the plant will only start contributing to group numbers more meaningfully by the financial year ending June 30, 2027 (FY27).”
It noted that earnings contribution from specialty chemicals production would depend on selling prices and feedstock cost, which would likely be market-driven.
MIDF Research said Dialog’s first venture into the production of specialty chemicals could potentially act as a catalyst for the latter’s expansion in the petrochemical sector by producing high value specialty chemical products for local and overseas markets.
“We believe Dialog’s involvement in the development of its malic acid plant will help support the growing demand in the region, as well as adding to the group’s performance through the expansion of its downstream business,” the brokerage said.
“This project will also be able to create new job opportunities for locals under the East Coast Economic Region,” it added.
MIDF Research maintained “buy” on Dialog with an unchanged target price of RM3.28. It said that it made no material change to its FY24 earnings estimates for Dialog, as the plant was expected to be completed only in 2026.
Meanwhile, Hong Leong Investment Bank (HLIB) Research said it was “neutral” on Dialog’s new venture, given the smallish revenue contribution from this investment, estimated to be less than 5% of FY22 total revenue.
It noted that the market price for malic acid in Asia hovered at the range of US$2,400-US$2,600 per tonne year-to-date.
With a production capacity of 12,000 tonnes and assumed average selling price (ASP) of US$2,400 per tonne, HLIB Research said Dialog was expected to rake in nearly US$29mil revenue per annum upon full utilisation, subject to fluctuation in ASP.
This would translate to approximately RM130mil in revenue per annum, it estimated.
“Furthermore, although the plant is expected to be operational in 2Q26, we think it may incur losses at its initial stage of capacity ramp up,” it added.
HLIB Research maintained “buy” on Dialog.
The brokerage, however, lowered its target price for the counter to RM2.38 from RM2.63 previously due to changes in its SOP valuation.
Source: The Star