CSE Global - OCBC Investment 2015-11-13: Softening Outlook

CSE Global - OCBC Investment 2015-11-13: Softening Outlook CSE GLOBAL LTD 544.SI 


 3Q15 broadly in-line 
 Expects slowdown in new orders 
 Reiterate BUY on lower FV 

3Q15 dragged by Asia Pacific region 

  • CSE Global Ltd’s (CSE) 3Q15 PATMI declined 9.6% YoY to S$8.5m mainly due to the absence of profit from discontinued operations. 
  • 3Q15 revenue declined 4.5% YoY to S$103.2m on lower contributions from the Asia-Pacific (-13.0%) and Americas (-2.7%) regions, respectively, but offset by a 13.1% growth in the Europe/Middle-East/Africa (EMEA) regions. 
  • While 3Q15 core gross margin improved 0.9ppt YoY to 28.9%, EBIT declined 16.9% to S$10.8m, dragged by lower-margin Australian projects and weakening AUD (against SGD). 
  • 3Q15 operating expenses were 7.7% YoY higher due to costs relating to acquisition of Crosscom business (S$0.6m) in Australia. 
  • Excluding discontinued operations, 3Q15 core PATMI of S$8.5m was only 1.6% YoY lower, which formed 24.3% of our FY15 forecasts. 
  • For 9M15, revenue grew 4.0% YoY to S$313.2m, driven by the Oil & Gas (+10.3%) segment, but offset by the Mining & Mineral (-19.7%) and Infrastructure (-13.7%) segments. 

Lack of large greenfield projects 

  • Management noted the persistent headwinds across all its segments, especially for O&G, has led to a lack of large greenfield projects, which saw new orders in 3Q15 decline 24.1% YoY to S$87.4m. 
  • Nonetheless, outstanding orders as at end-3Q15 still grew 10.0% YoY to S$222.0m as CSE focused on securing the higher-margin brownfield (maintenance) and smaller greenfield (< S$5m) projects. 
  • Looking ahead, outlook next year is likely to soften further given the lack of large greenfield projects, and we expect to see lower revenue recorded. However, as large greenfield projects typically have lower margins, the change in revenue mix means the decline in PATMI will be at a slower rate than revenue drop. 
  • Management’s active role in managing the quality of new projects and protecting gross margins also helps to mitigate the impact on its bottom-line. Nonetheless, we believe CSE’s earnings should remain largely resilient given its exposure to recurring brownfield projects. 

Lower forecasts; reiterate BUY 

  • On weaker outlook, we keep FY15 forecasts unchanged but pare FY16F core PATMI by 9.5%. Rolling forward to 9x blended FY16F PER, our FV decreases from $0.62 to S$0.58. 
  • Reiterate BUY, supported by a solid balance sheet and decent FY15F dividend yield of 5.6%.

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2015-11-13
OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 0.58 Down 0.62