CSE Global - UOB Kay Hian 2016-01-26: Clouded Visibility In 2016 Despite Acquisition; Downgrade To HOLD

CSE Global - UOB Kay Hian 2016-01-26: Clouded Visibility In 2016 Despite Acquisition CSE GLOBAL LTD 544.SI 

CSE GLOBAL (CSE SP) Clouded Visibility In 2016 Despite Acquisition; Downgrade To HOLD 


VALUATION 

  • Downgrade to HOLD with a target price of S$0.41, based on 7.65x 2016F PE. 
  • Our target PE for CSE Global (CSE) is at a 50% discount to the sector mean of 15.3x to account for the challenging operating environment ahead. 
  • Global peers’ share prices have also de-rated, with the average forward PE now at 15.3x vs 17.2x previously. 
  • Entry price: S$0.360. 


WHAT’S NEW 

  • CSE Global recently announced that has proposed the acquisition of CC American Oilfield, L.L.C. and ROC-Mar, Inc (CCAG) under the asset purchase agreement. 
  • CSE Global will acquire these assets for US$6.05m with an additional consideration of US$750,000 payable to the sellers if they achieve profit before tax targets of US$4m for both 2015 and 2016. 
  • Using an assumed US tax rate of 35%, CSE will be acquiring the business at a valuation of 2.6x 2016F PE. 


INVESTMENT HIGHLIGHTS 


CCAG designs, manufactures, repairs, and services oil and gas pressure vessels for the US energy industry. 

  • Although management did caution that CCAG’s business in the short term may be impacted due to the current low oil prices, they believe that the acquisition will create opportunities in new markets, particularly in the Eagle Ford shale region. 

However, we continue to see challenging operating environment ahead. 

  • Management had commented previously that the low commodity prices and uncertain global economic outlook have clouded operating visibility with many clients having cancelled or deferred large projects. 
  • Bigger contractors may also enter CSE’s target market and start offering services at lower prices, in our view. 
  • In addition, as CSE’s maintenance project caters more to the production platforms and with crude oil prices falling to 12-year lows, we expect clients to ask for fee cuts. 

Against this backdrop, we expect 2016 revenue to weaken and margins to contract. 

  • We cut our 2015 and 2016 earnings forecasts by 11% and 28% respectively to account for lower revenue and compressed gross margins. 
  • As of 3Q15, CSE had an orderbook valued at S$222.0m vs S$255.0m at end-14. In 3Q15, order intake fell to S$87.4m, down 24% yoy. 
  • As the purchased agreement has not been signed by the seller, we did not incorporate the earnings attributable to CSE Global by CCAG for 2016.



Brandon Ng Chenhao CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-26
UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 0.41 Down 0.71


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