CSE Global - DBS Research 2017-02-28: Improving prospects are priced in

CSE Global - DBS Vickers 2017-02-28: Improving prospects are priced in CSE GLOBAL LTD 544.SI

CSE Global - Improving prospects are priced in

  • 4Q16 net profit of S$6.2m (-24% y-o-y, +53% q-oq) exceeded S$5m estimate; cost savings and higher Asian contribution boosted margins.
  • FY17 earnings revised up 7% despite weak order wins due to better O&G outlook and infrastructure projects.
  • Maintain HOLD with a revised TP of S$ 0.46.



Earnings may have bottomed out in FY16. 

  • CSE is likely to see higher revenue in FY17 with uptick in oil & gas sector leading to new greenfield project wins in addition to the regular flow business. 
  • CSE has shown the ability to secure S$60-70m of flow business each quarter even during the toughest times. However, given weak order book so far (-15% y-o-y), improving prospects are likely priced in at 10x FY17 PE on ex-cash basis versus histroical average of 9.6x.


Cost cutting improved bottom line sequentially but order wins were weak. 

  • Net profit of S$6.2m (-24% y-o-y, +53% q-o-q) was above our expectations mainly due to cost reductions undertaken by CSE. 
  • New order wins at S$58m (-18% y-o-y, - 18% q-o-q) in 4Q16 were weak and order book shrank to S$163m, 15% lower than the start of the year. 
  • More contribution from higher-margin infrastructure projects and completion of certain ongoing projects helped to improve gross margins during the quarter.


Higher infrastructure contribution could provide added support.

  • In FY16, the infrastructure segment contributed 19% of top line, up from 13% in FY15 while also seeing increasing order wins. The management believes the company will be able to bring in more infrastructure-related projects over time, which should provide much-needed support for its order book. The segment also has superior margins (segment operating margin of 14% vs 9% overall operating margin in FY16). 
  • Our FY17F/FY18F earnings are raised by 7%/18% as we revise up gross margin projections offset partially by lower order win projections.


Valuation

  • We have raised our TP to S$0.46 using ex-cash PE of 9.6x (5- year historical average) plus expected net cash position of ~S$70m. 
  • Fixed dividend commitment of 2.75Scts (5.7% yield) is quite attractive for yield seekers.


Key Risks to Our View

  • Lack of a recovery in investments in oil & gas projects. The company may not be able to meet our projections if investments in the oil & gas segment remain at current low levels.




Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2017-02-28
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.460 Up 0.410



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