Published on 11 Sep 2020.
RAM Ratings has assigned respective preliminary ratings of AA2/Stable and A1/Stable to Dialog Group Berhad’s (Dialog or the Group) up to RM3 bil Senior Islamic MTN and up to RM3 bil Subordinated Perpetual Islamic Notes. These are combined under Dialog’s proposed RM3 bil Senior Islamic Medium-Term Notes and Subordinated Perpetual Islamic Notes Programme (the Proposed Programme). The senior rating is supported by Dialog’s strong business positions, especially in the tank terminals sector, resilient earnings and conservative financial profile. The proposed Subordinated Perpetual Islamic Notes are rated two notches below the rating of the senior notes to reflect increased loss severity and risk of deferred profit payments.
Dialog is an established technical service provider in the upstream, midstream and downstream segments of the oil and gas (O&G) sector and also the petrochemical industry. It is fairly well represented throughout the O&G value chain, with a diverse range of services and products that also provides synergistic benefits across its business segments. In addition, the Group has interests in upstream O&G production assets, although with small contributions.
Dialog is a leader in the domestic tank terminals sector, through its substantial ownership of and operating interests in Pengerang Deepwater Terminals (PDT), Tanjung Langsat Terminals and Kertih Terminals. Strategically located near O&G processing clusters, these terminals have been expanded, the capacity of which now stands at about 4.6 mil cubic metres (cbm). PDT, with deepwater jetties that are unique in this region, has substantial growth potential that is in line with the needs of current and future O&G and petrochemical plants at the Pengerang Integrated Petroleum Complex. Based on secured contracts, the storage capacity of the Group’s terminals is expected to augment to 5.1 mil cbm by mid-2021.
Most of Dialog’s revenue and profits are derived from contracted services in its upstream, midstream and downstream operations. The midstream segment’s terminal businesses, which account for a big chunk of the Group’s pre-tax profit, are relatively stable. These are underpinned by long-term lease contracts and steady operating costs. Meanwhile, Dialog’s bottom line has been rising in the last five years, driven by its midstream and downstream segments. This has been possible despite the O&G downcycle, when many players have incurred massive losses. Dialog’s midstream and downstream segments are anticipated to keep growing, supported by the further expansion of PDT.
Dialog’s expansion-related debt load had doubled in the last five years to RM1.93 bil as at end-June 2020. Even so, its gearing ratio remained manageable at 0.45 times while its net gearing stood at only 0.16 times, thanks to its hefty cash pile. Backed by its robust cashflow, the Group’s funds from operations (FFO) debt coverage and FFO net debt coverage ratios have been hovering around 0.3 times and above 0.6 times in the last three years. Its debts are likely to exceed RM3 bil by end-June 2024, to partially fund its business expansion. Nonetheless, Dialog’s balance sheet is envisaged to remain sturdy through the next five years, with its gearing and net gearing ratios peaking at a respective 0.55 and 0.35 times. As contributions from midstream associates become increasingly more significant, the Group’s FFO debt coverage (including dividends) is anticipated to range around 0.30-0.35 times.
Dialog plans to add to its upstream production assets while venturing downstream to the manufacturing of petrochemicals. We are cautious about such fast-paced expansion on multiple fronts. New businesses may heighten the Group’s execution risk and expose it to unfamiliar hazards. That said, we understand that Dialog will seek suitable partners that can share the requisite expertise and corresponding risks in its upstream and downstream ventures. We also derive comfort from the management’s track record of being financially prudent and risk-averse. The Group is also exposed to volatile forex and input prices, although these risks are manageable.
Under the Proposed Programme, Dialog can issue both subordinated perpetual Islamic notes and senior Islamic notes under a combined RM3 bil limit. The proposed Subordinated Perpetual Islamic Notes will be deeply subordinated and only rank ahead of equity; profit payments can be deferred at Dialog’s discretion. The Group can also issue unrated perpetual and senior notes under the Proposed Programme.
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Ratings on Dialog Group Bhd