KUALA LUMPUR: Kenanga Research expects a gradual recovery in Dialog Group Bhd's earnings before interest, taxes, depreciation and amortisation (Ebitda) margins, as well as average midstream utilisation rates of 90 per cent.
The firm said Dialog's margins for downstream contracts had stabilised 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 the second quarter of financial year 2021 (2Q21), Dialog's Ebidta margins peaked at 44 per cent following the onset of the pandemic.
"Dialog reassured that margins have now turned the corner. This is following the expected completion of older contracts by the end of financial year 2024 (FY24) estimate.
"For instance, the extension option on Petronas' five-year umbrella contract for plant turnaround and maintenance is due for exercise in calendar year 2024 (CY24) estimate.
"Moreover for new contracts, Dialog will incorporate higher pricing to reflect the current challenging environment," it said in a note today.
Kenanga Research has maintained its "Outperform" call on Dialog, with an unchanged target price of RM3.10.
The firm likes Dialog due to its resilient non-cyclical earnings with multi-year growth prospects from future capacity expansion, active diversification into upstream production assets enables the group to capitalise on oil price rallies, and near-term earnings expansion from Tanjung Langsat Terminal Phase 3 that is targeted for completion by the end of CY24.
Risks to Kenanga Research's call include prolonged and intensifying cost pressures, delay in capacity expansion plans, and reduced utilisation of tank terminals.