Midstream anchors Dialog 

ONCE a highly-rated blue chip, Dialog Group Bhd appears to have lost some shine, especially after posting its first-ever quarterly loss in the second quarter ended Dec 31, 2024 (2Q25).

The loss stemmed from a kitchen-sinking exercise, which included a one-off impairment of investments in petrochemical and renewable energy projects, as well as cost overruns in its engineering, procurement, construction, and commissioning (EPCC) projects.

The oil and gas services provider returned with a RM134.9mil net profit in 3Q25 ended March 31, 2025.

However, this represented a year-on-year decline of about one-quarter due to softer contributions from its EPCC and upstream segments.

Several research houses have revised downwards their earnings forecasts for FY25 to FY26 as the group faces a mixed outlook, navigating industry volatility that comes with the tariff war.

While most analysts maintain a “buy” call on the stock, their optimism is measured, as reflected in the downward revision of target prices.

The share price has recovered notably from a low of RM1.13 in early April to around RM1.54, although that’s well below historical levels. Analysts see limited upside in the near-to-medium term, citing continued caution over the group’s downstream activities.

That said, the outlook is not entirely bearish. Dialog continues to find support in its midstream segment.

As the second-largest petroleum storage player in South-East Asia, this segment contributes about 60% to the group’s bottom line, providing a stable revenue base.

The rest comes roughly equally from its upstream and downstream businesses.

With the focus on energy security, analysts say storage infrastructure will continue to benefit from ongoing geopolitical tensions, supply chain disruptions and the need for strategic stockpiling.

In Asia, terminal utilisation rates are expected to remain strong at around 90%, with key hubs like Singapore operating even higher, at approximately 95%, according to recent industry reports.

For Dialog, this macro backdrop has helped sustain performance in its midstream segment. Utilisation and leasing rates for its independent terminals have remained above 90% even in the face of softer oil prices.

Storage rates have also been stable, hovering around S$6 to S$6.50 per cubic m per month and are likely to remain at these levels through FY25 to FY26, analysts say.

Following the 2Q25 impairments, Dialog is also consolidating its operations around core, income-generating segments.

For one, the downstream specialty chemical plant producing malic acid in Kuantan, Pahang has been shut down. Launched in 2023, the venture struggled to gain commercial traction due to a combination of market and operational challenges.

The group is also in the process of divesting its stake in a joint venture (JV) involved in the production of food-grade recycled polyethylene terephthalate pellets.

However, Dialog is not retreating entirely from petrochemicals. It has a JV with Japan’s Morimatsu Group where it has invested RM250mil to expand its fabrication facilities in Pengerang, Johor.

Construction has been completed, with operations expected to begin contributing to earnings in the 4Q25, according to CIMB Securities.

Dialog had earlier guided that the facility is expected to generate yearly revenue of about RM300mil. Assuming a net margin of 7%, this implies an annual profit contribution of around RM10.3mil to Dialog, based on its 49% equity stake, the research firm adds.

Phase 1 of the group’s renewable fuel storage facilities at Terminals Langsat 3 began operations early this year, reinforcing Dialog’s expertise in terminal operations while positioning it to benefit from the energy transition.

The second phase, which will add further capacity, is expected to be completed by September 2026.

On the upstream front, Dialog is looking to scale up its activities. Its current portfolio includes a cluster of mature oil and gas fields offshore Sarawak, as well as a number of onshore producing fields in Thailand.

As part of its strategy, the group aims to deepen its involvement across the field development cycle, particularly by leveraging its capabilities in engineering and specialist technical services.

However, oil prices have declined from around US$80 per barrel at the start of 2025 to approximately US$70 by end-March, and have recently softened further to around US$60.

This decline reflects a combination of increased global supply, higher inventory levels, and a more cautious demand outlook.

At the US$60 to US$70 range, industry analysts generally expect upstream activity to be subdued but stable.

Looking beyond near-term price dynamics, Dialog also plans to develop Pengerang Deepwater Terminals (PDT) as a regional downstream hub for the oil, gas and petrochemical industries.

The PDT, was conceptualised in 2007 to be the “Rotterdam of the East” considering its strategic location at the southern tip of Peninsular Malaysia, just next to Petroliam Nasional Bhd’s Pengerang Integrated Complex (PIC).

With an additional 200ha still available for development, the site holds the potential to boost storage capacity by another 40% to 50%, providing significant headroom for future growth.

This long-term infrastructure play may be what is drawing the Employees Provident Fund (EPF) and the Retirement Fund (Inc) (KWAP), which have been accumulating Dialog shares following the recent price correction. EPF owns a 16.72% stake in the group, while KWAP has 10.58%.

Founder and executive chairman Tan Sri Dr Ngau Boon Keat, key architect behind the PIC project, holds an indirect 18.62% stake. At current levels, the stock is trading at a forward price-to-earnings of 18 times, below its historical average of 26 times.