CSE Global - OCBC Investment 2016-02-25: Strong Balance Sheet A Boon Amid Headwinds

CSE Global - OCBC Investment 2016-02-25: Strong Balance Sheet A Boon Amid Headwinds CSE GLOBAL LTD 544.SI 

CSE Global - Strong Balance Sheet A Boon Amid Headwinds 

  • Resilient earnings on stable margins 
  • Lack of large greenfield projects 
  • Recent acquisition to contribute positively

FY15 in-line with our expectations

  • CSE Global Limited’s (CSE) FY15 PATMI from continuing operations were within expectations as it declined 6.4% to S$31.2m on the back of a 1.1% drop in revenue to S$412.0m due to lower contributions from Asia-Pacific (-15.3%), but offset by 6.6% and 8.7% growth in the Americas (+6.6%) and Europe/Middle-East/Africa (EMEA) regions, respectively.
  • CSE’s FY15 gross margins from continuing operations were stable at 28.7%, attributed to better sales mix of brownfield jobs, which command higher gross margins. 
  • FY15 EBIT declined 13.0% to S$40.5m, dragged by Australian projects with lower gross margins and weaker AUD against SGD. FY15 operating expenses were 4.8% higher mainly due to inclusion of expenses of the newly-acquired Crosscom business and higher provisions for doubtful debts. 
  • With headwinds in the oil & gas industry, new orders received for FY15 dropped 21.1% to S$351.0m while outstanding orders decreased 24.4% to S$192.7m. 

No end to suppressed oil prices yet 

  • With 80.1% of CSE’s FY15 revenue derived from customers in the oil & gas (O&G) sector, we believe that capex budget cuts by large oil majors following the oil rout have reduced the number of available large greenfield projects in the market. 
  • And just a day ago, Saudi’s oil minister said no to oil production cuts as part of OPEC’s strategy to curb excess supply by forcing out producers with high production costs by suppressing oil prices. That said, with headwinds in the O&G sector, we believe CSE’s more than 50% exposure to recurring maintenance (brownfield) jobs will help sustain its earnings resilience. 
  • Also, we believe CSE’s strategy to focus on smaller (< US$5m) greenfield projects will help to offset the decline in large greenfield jobs. 
  • With CSE sitting on solid net cash position, management said they will continue to look for potential accretive acquisition to diversify exposure and seek growth. 

Resilient earnings and solid balance sheet 

  • In view of the headwinds that majority of CSE’s customers are facing, we cut our FY16F PATMI by 10.3%. 
  • Consequently, our FV decreases from S$0.540 to S$0.485. 
  • Maintain BUY, supported by a decent FY16F dividend yield of 5.4%. 

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2016-02-25
OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 0.485 Down 0.54