CSE Global - OCBC Investment 2015-12-11: Resilient earnings a positive in turbulent times

CSE Global - OCBC Investment 2015-12-11: Resilient earnings a positive in turbulent times CSE GLOBAL LTD 544.SI 

CSE Global: Resilient earnings a positive in turbulent times 

 Oil rout worsened after OPEC’s meeting 
 Largely resilient earnings 
 Slightly lower forecasts on weaker outlook 

OPEC failed to agree to slow oil production 

  • At a meeting on 4 Dec, Organization of the Petroleum Exporting Countries (OPEC) failed to agree on reducing oil production but has set aside its quota of 30m/barrels a day until the next meeting in Jun 16. The result on 7 Dec was a 5.8% and 5.3% drop in WTI Crude and Brent prices, settling at their lowest prices in nearly seven years. 
  • According to Bloomberg, OPEC highlighted disagreement among members on how to accommodate incoming supply from Iran when sanctions are lifted. OPEC started its fight against U.S. shale producers since 2014 in a bid to regain market share and OPEC’s decision on Friday essentially reaffirmed that it will continue to maintain production levels, as the cartel looks to eliminate players with higher production costs in a low oil price environment. 
  • Having seen large capex cuts by major oil companies, we expect budgets to see further reduction in a depressed oil price market. 

Supported by recurring brownfield jobs 

  • Even with more uncertainty over oil & gas (O&G) outlook, we still think CSE Global Ltd’s (CSE) earnings will likely remain largely resilient given its exposure to recurring brownfield maintenance jobs, which contribute about 50% of its total annual revenue. 
  • Although 80% of CSE’s revenue is driven by O&G customers, most if not all of its recurring brownfield maintenance projects are related to the production and pipelines stages instead of the exploration and development phase (first to face capex and budget cuts). 
  • However, we do acknowledge that new greenfield projects will likely slow down further but at least for FY15, we forecast for a 5% decline in PATMI, as any cuts in budget by its customers will likely reach the maintenance-related expenses in the later stages, if low oil prices sustain for a prolonged period. 

Price decline overdone; maintain BUY 

  • That said, on weaker outlook, we cut our FY15/16F forecasts by 3.7%/6.7%. 
  • Consequently, our FV decreases from S$0.580 to S$0.540 (9x FY16F PER). 
  • Supported by a decent FY15F dividend yield of 6.0%, maintain BUY as we think the recent price decline is overdone. 

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2015-12-11
OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 0.54 Down 0.58