CSE Global - OCBC Investment 2016-05-12: Soft earnings outlook

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CSE Global: Soft earnings outlook

CSE Global Limited’s (CSE) 1Q16 PATMI from continuing operations missed expectations as it declined 20.9% YoY to S$5.5m on the back of a 16.5% drop in revenue to S$84.2m due to lower contributions from Asia-Pacific (-25.4%) and the Americas (-19.4%) regions, but offset by 37.7% growth in Europe/Middle-East/Africa (EMEA) region.
By industry, 1Q16 revenue was mainly impacted by oil & gas (O&G) segment, which decreased 20.4% YoY to S$68m.
While CSE’s 1Q16 gross margin was largely stable at 28.6%, EBIT declined 36.2% YoY to S$6.4m, dragged by deferral of Australian projects, weaker AUD against SGD, as well as lower gross margins achieved in the Americas and EMEA regions.
CSE’s O&G segment 1Q16 EBIT was the worst hit with 47.2% YoY plunge to S$4.2m. Excluding one-off transaction expenses relating to new acquisitions, 1Q16 core PATMI declined by a lower 11.9% YoY to S$6.1m, and formed 22.0% of our FY16 forecasts.

With new orders received in 1Q16 dropping 23.8% to S$74.9m and outstanding orders decreasing 28.9% to S$179.6m, we expect its FY16 earnings to soften.
Also, given that more than 80% of its 1Q16 revenue was contributed by customers in the O&G sector, we expect the declining number of available greenfield projects in the market, due to low oil and commodity prices, may lead to CSE taking on projects with lower margins.
However, we still expect its higher margins recurring brownfield projects to contribute about half of CSE’s FY16 revenue.
While management has stated the focus now is to build up and secure more projects from infrastructure segment (17%/32% of 1Q16 revenue/EBIT), we think this takes time and is unlikely to materially offset the weakness in its O&G segment.

In view of the headwinds, we cut our FY16/FY17 PATMI forecasts by 8.8% and 8.3%, respectively.
Consequently, we downgrade CSE to HOLD rating as we lower our FV from S$0.485 to S$0.440.
However, given its solid balance sheet (net cash of S$57.3m) and resilient recurring revenue, we believe longer-term investors may look for buying opportunities closer to S$0.40.

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2016-05-12

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