KUALA LUMPUR: RHB Research is positive on Dialog Group Bhd's (DGB) maiden venture into specialty chemicals production to diversify its earnings base further, despite earnings from this business being rather volatile, depending on product spreads.
"We were guided that the project's internal rate of return (IRR) could be double digits at least, with a payback period expected within 10 years," the research firm said in a note.
To recap, DGB will build, own and operate a specialty chemical plant producing malic acid with a capacity of approximately 12,000 mtpa in Gebeng, Pahang.
The plant will be situated within the integrated chemical site operated by BASF Petronas Chemicals.
Malic acid is a specialty chemical mainly used as a food additive in the food and beverage (F&B) industry.
The plant is targeted to be completed by the second quarter (Q2) of 2026.
This marks DGB's maiden venture into specialty chemical production.
The company has initiated discussions and engagements with several malic acid distributors and major customers in Malaysia and abroad.
The feedstock for the malic acid production will come from local suppliers.
"We have been guided that the project's IRR could be in at least double digits, with a payback period expected within 10 years," the bank-backed research firm said.
The total investment value is estimated at US$80 million. At a debt-to-equity ratio of 70:30, the total equity outlay of US$24 million is manageable for DGB, given its strong balance sheet, RHB Research noted.
RHB Research also noted that DGB will also execute this project's engineering, procurement, construction and commissioning (EPCC) work.
"Assuming malic acid prices are at US$2,000–US$4,000 per tonne, the plant could generate annual revenue of US$24–US$48 million, up to 4-7 per cent of our FY24 revenue.
"We maintain our earnings estimates, as the plant will only start contributing to company numbers more meaningfully by FY27.
"While we are positive about the project, as it helps further diversify DGB's business across the value chain, its earnings contribution could be rather volatile, depending on the selling prices and feedstock costs (likely to be market-driven).
"Our Buy call with a target price stays at RM2.85 and includes a 4 per cent of environmental, social, and corporate governance (ESG) discount factored in, based on DGB's ESG score of 2.8 out of 4 and as per our in-house proprietary methodology," RHB Research said.
Downside risks include weaker-than-expected tank terminal rates and slower-than-expected expansion of Pengerang Phase 3.
