CSE Global - DBS Research 2016-02-25: Impressive results, weak order wins

CSE GLOBAL LTD 544.SI

CSE Global - Impressive results, weak order wins

4Q15 net profit of S$8.1m (-22% y-o-y,-5% q-o-q) was c.5% higher than expectations
Project completions helped boost bottom line
Order book (-24% y-o-y) under pressure due to the lack of large greenfield project wins

CSE secures almost 60% of its business from brownfield projects which are recurring in nature and command superior margins than other projects.
Another 20% comes from small greenfield projects where CSE is positioned quite well.
The remaining 20% of its business comes from large greenfield projects which involve the 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.

Change in revenue mix and order completions boosted margins (GP margin of 31.1% in 4Q15 vs 28.9% in 3Q15). Cash flows also improved due to better collections from project delivery.
However, new order wins of S$70.8m (-58% y-o-y) was below our S$95m estimate, causing the order book to dip to S$192.7m (-24% y-o-y).

CSE has acquired certain assets of CC American Group, an oil & gas equipment manufacturer and repairer, in January 2016 for US$6.05m at single-digit PE valuations. This is in addition to the acquisition of Crosscom, a telecom equipment player, in 2Q15.
Management believes the acquisitions will be bottomline accretive and help the company grow in the long term.

We revise down our TP to S$0.46, based on a lower ex-cash FY16F PE of 6.2x plus net cash of S$54m.
We increased the discount used on CSE’s historical average PE of 9.6x to 35%, to reflect the increasingly volatile and challenging outlook in the oil & gas sector.

Forex may impact the bottomline further. Further weakness in AUD may adversely impact its profits as Australia makes up ~25% of group business. This may be offset by US business which accounts for about 50% of its group business.

Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2016-02-25

DBS Vickers Analyst Report HOLD Maintain HOLD 0.46 Down 0.49