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.

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 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.

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.

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.

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