CSE Global - DBS Research 2016-01-06: Limited upside but hold for 6% yield

CSE Global - DBS Research 2016-01-06: Limited upside but hold for 6% yield CSE GLOBAL LTD 544.SI 

CSE Global - Limited upside but hold for 6% yield 

  • Trim FY15F/16F earnings by 7%/15% due to slowdown in large greenfield projects 
  • With healthy net cash position, absolute dividends are likely to be maintained, implying over 6% yield 
  • Downgrade to HOLD for limited upside potential with our new TP at S$0.49. Dividend yield of 6% to support the share price 

Large greenfield projects at risk. 

  • CSE secures almost 60% of its business from brownfield projects which are recurring in nature and command superior margins than other projects. 
  • Another 20% of its business comes from small greenfield projects where CSE is positioned quite well. An example of a small greenfield project will be an expansion of production facilities in an adjacent area. 
  • The remaining 20% of its business comes from large greenfield projects which involve construction of new production facilities by oil companies. 
  • While small greenfield projects are still ongoing, there is a clear slowdown in large greenfield projects due to the low oil price. 
  • We have lowered our order win assumptions to S$380m for FY16F versus S$410m earlier. 
  • Coupled with slightly lower margin assumptions, our FY15F/16F earnings are cut 7%/15%. 
  • North America market (59% of EBIT in 9M15) could show some weakness which could be partially offset by slight improvement in Asia Pacific (32%). 

Dividends are likely to be maintained. 

  • On top of its net cash position of S$8m in 3Q15, management expects quite healthy cash generation as several projects reach billing milestone in the early FY16. As such, CSE should be able to maintain dividends even if earnings are volatile. 

Downgrade to HOLD with revised TP of S$0.49. 

  • We revise down our TP to S$0.49, based on ex-cash FY16F PE of 7.7x plus net cash of S$23m. 
  • We use a discount of 20% to CSE’s historical average PE of 9.6x, to reflect the challenging outlook in the O&G sector.

Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2016-01-06
DBS Vickers Analyst Report HOLD Downgrade BUY 0.49 Down 0.57