CSE Global - DBS Research 2016-05-11: Weak new order wins; negatives priced in

CSE Global - DBS Research 2016-05-11: Weak new order wins; negatives priced in CSE GLOBAL LTD 544.SI 

CSE Global - Weak new order wins; negatives priced in

  • 1Q16 net profit of S$ 5.5m (-20% y-o-y, -15% q-o- q) was well below our expectations
  • Order wins of S$75m was also below our estimate
  • Maintain HOLD on revised TP of S$0.40



Large Greenfield project wins to remain weak. 

  • Continued weakness in commodity prices may point to market conditions remaining challenging. CSE has a high exposure to commodities (80%+ of revenue). 
  • We believe Greenfield investments in oil & gas, and mining segments will continue to be impacted by low global commodity prices which are slowing down order wins for CSE. 
  • However, CSE receives a large portion of its business from Brownfield contracts at present, which may cushion some of the impact of weak oil prices.


Topline drop hurts profits. 

  • Net profit of S$ 5.5m (-20% y-o-y, - 15% q-o-q) was below our S$7m estimate for 1Q16. 
  • The decrease was due to the dip in revenues and gross profits stemming from the global downturn in the oil and gas sector. However, CSE has managed to maintain relatively stable margins. 
  • Depreciation of AUD against SGD, transaction costs for new acquisitions and costs related to newly acquired businesses also dented the bottomline


Weak new order wins. 

  • Outstanding order book stood at S$180m as at the end of 1Q16, down nearly 30% from a year earlier. 
  • New order wins of S$75m was well below our expectations. 
  • Accordingly, we have revised down our estimate of new order wins to S$ 320m in FY16F from S$ 380m earlier. As a result, we have revised our FY16F earnings down by 16% to S$ 25.3m.


Valuation:

  • We revise down our TP to S$0.40, based on lower earnings estimate for FY16F. 
  • We use an ex-cash FY16F PE of 6.2x and net cash of S$49m in our valuation. 
  • We have imputed a 35% discount to CSE’s historical average PE of 9.6x to reflect the volatile and challenging outlook in the oil & gas sector.


Key Risks to Our View:

  • Forex may impact bottomline further. Further weakness in AUD may adversely impact CSE’s profits as Australia makes up ~25% of its business.




Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2016-05-11
DBS Vickers Analyst Report HOLD Maintain HOLD 0.40 Down 0.46


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