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

CSE Global - OCBC Investment 2016-05-12: Soft earnings outlook CSE GLOBAL LTD 544.SI 

CSE Global: Soft earnings outlook 

  • 1Q16 missed expectations 
  • Oil & gas headwinds hitting business 
  • Building up infrastructure segment 

Lesser projects from oil & gas customers in 1Q16 

  • 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. 

Expect margins to weaken 

  • 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. 

FY16F dividend yield of 4.6% 

  • 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
OCBC Securities SGX Stock Analyst Report HOLD Downgrade BUY 0.440 Down 0.485