CSE Global - CIMB Research 2016-06-21: Steady course

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CSE Global - Steady course

We like CSE for its management quality, attractive FY16 dividend yield of 5.2%, net cash of c.S$60m (US$45m) and resilience vs. other small-cap O&M companies.
It targets double infrastructure projects to comprise 30% of group revenue by FY17, lifting overall margins as infrastructure fetches EBIT of 14% vs. 6% for oil & gas.
ERP 2 could also add S$40m-50m (US30m-37m) to CSE’s orders in FY16, bringing total wins to S$400m (US$298m) or 10% higher than in FY15.
We raise EPS by 3-5% for FY17-18, as we forecast higher gross margins to incorporate more infrastructure projects.

Maintain Add with higher target price of S$0.57, based on 9.7x CY17 P/E (1 s.d. below 5-year mean). Stronger-than-expected order wins could catalyse the stock.

CSE is one of the top 10 dividend stocks (excluding REITs) in Singapore, with an attractive FY16 dividend yield of 5.2% (40% payout) backed by c.S$60m (US$45m) net cash at end-1Q16.
It is also one the few companies that is generating positive operating cash flow (S$19m or US$14m at end-1Q16) and the trend should continue, backed by brownfield projects that dominated 60% of its 1Q16 revenue.

To counter the challenges in the oil and gas sector, CSE aims to double the contribution from infrastructure from 15% in FY15 to 30% of group revenue by FY17.
Its infrastructure projects comprise control systems/system integration for power plants, train systems (Australia) and waste treatment (US). These projects fetch higher EBIT margins of 14% (gross margins of 35-40%) vs. oil and gas EBIT margin of 6% (gross margins of 20-30%). Hence, we believe margin expansion could be underway by FY17.

CSE has secured the design phase (S$3m or US$2m in contract value) for Electronic Road Pricing 2 (ERP2) in Singapore and is expected to receive the full award by 3Q16 (S$40m-50m or US$30m-37m). ERP 2 project was awarded to the Singtel-Mitsubishi NCS-MHI consortium for S$556m (US$414m) in Feb 2016 and will be rolled out fully by 2020. CSE is the only system integrator in the consortium.

We view CSE as a mini ST Electronics, with its capability in electronics system integration across segments- oil & gas, infrastructure and mining & minerals.
Our FY17 EPS growth estimate of 12% is achievable if CSE gains c.S$80m (US$60m) brownfield wins (maintenance, upgrade and enhancement) per quarter and S$100m (US$74m) greenfield projects (new installation).
It clinched c.S$75m (US$56m) of orders in 1Q16 and could reach S$400m (US$298m, +10%yoy) with ERP 2 by end-16.

CSE is our top pick among the small caps with oil and gas exposure because of its earnings predictability, balance sheet strength and dividend yield. We believe the possible downside risk of earnings decline in FY16 has been priced in.
CSE is an under- covered stock that could be well positioned for catalysts of oil price recovery and rising infrastructure spending trend.
At 0.89x FY16 P/BV, ROE of 11% and dividend yield of 5.2%, we see value in CSE.
Integration with new M&A could be an upside risk.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-06-21

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