CSE Global - CIMB Research 2015-11-16: Guiding for a more challenging 2016

CSE Global - CIMB Research 2015-11-16: Guiding for a more challenging 2016 CSE GLOBAL LTD 544.SI 

CSE Global - Guiding for a more challenging 2016 

  • 3Q core net profit of S$8.5m was slightly below our expectations and consensus due to lower revenue. 9M15 formed 67% of our FY15F EPS. 
  • Management guides for a more challenging 4Q15 and 2016. We cut our FY15-17F EPS by 10-19% and our FY15-17F DPS by 8-25% 
  • Nonetheless, we still see c.16% total returns (including c.5% dividend yield). Add maintained. 

3Q15 slightly below on lower turnover 

  • At 25% of our FY15F EPS (9M15 at 67%), CSE’s 3Q15 core net profit of S$8.5m (-2% yoy; +6% qoq) was slightly below our expectations and Bloomberg consensus. 
  • The negative deviation sprang from lower revenue. Despite the inclusion of higher admin expenses from the acquisition of Crosscom, EBIT margin for 3Q remained solid, at 10.2% (2Q15: 9.9%) due to better margins achieved from the completion of projects in the US. 

The Americas outperformed; Asia underperformed 

  • The Americas recorded flat revenues qoq but higher EBIT margin of 12.4% for 3Q15 (2Q15: 10.8%). Asia-Pacific, on the other hand, posted lower revenue of 13% yoy and lower EBIT of 55% yoy, achieving an EBIT margin of 8.7% vs. 17% in 3Q14. 
  • An unfavorable sales-mix (with more revenues from lower-margin Australian projects) and the weaker A$ vs. S$ were the reasons. 
  • Surprisingly, turnover from oil & gas for 9M15 was up 10% yoy but mining and infrastructure declined by 20% and 14%, respectively. 

Expect more cash collections by end-2015 

  • Due to achievement of project delivery milestones, which led to higher billings and collections, CSE generated S$10.4m in operating cash inflow in 3Q15, reversing the outflows in 1H (9M15: S$4.2m outlow). 
  • With large projects at the tail-end, we expect positive cash generation in 4Q. As at 3Q15, CSE held net cash of S$8.2m. 

Guiding for a more challenging 2016 

  • CSE bagged S$87.4m in orders in 3Q15, bringing order book to S$222m. Management said that it continues to see a lack of large greenfield projects. Activity levels for brownfield/maintenance projects have also declined by mid-teens. 
  • Also, payment terms are getting longer while price pressures from fiercer competition have intensified, which could erode margins. We project order book for 2016 to hover at slightly above S$200m. 

Decrease FY15-17F EPS by 10-19%; maintain Add 

  • We cut our FY15F EPS by 10% to factor in the miss. Per the guidance above, we are now expecting a weaker 4Q, as we could see lower margins. 
  • We also reduce our FY16- 17F EPS by 16-19% on weaker guidance, and expect an earnings decline for FY16. 
  • Nonetheless, given CSE’s resilient and recurring earnings, we still see c.16% total returns (including c.5% dividend yield) to our 9x CY17F P/E-TP, as we rollover to endCY16 valuation (prev. CY16F P/E of 9x).
  • TP S$0.55.

YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2015-11-16
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.55 Down 0.60