CSE Global - CIMB Research 2016-08-11: 2Q16 results ~ Guaranteed dividends

CSE GLOBAL LTD 544.SI

CSE Global - 2Q16 results: Guaranteed dividends

2Q16 net profit of S$5.5m (US$4m, +0.3% qoq) was below our expectations and Bloomberg consensus. 1H16 net profit was below, at 41% of our FY16 forecast.
Americas oil & gas brownfield revenue was weaker than expected in 2Q16 due to customers’ lower operating budget and hurricane season (could continue in 3Q16).

Interim DPS of S$0.0125 was declared and strong net cash of S$49m (US$35m) at end-2Q16 would support FY16 DPS of S$0.0275, as guided by management.
We still like CSE for its strong cash flows, recurring brownfield projects and shift towards infrastructure.

Revenue from Americas (53% of 2Q16 revenue) was down by 17% qoq due to lower time and materials flow work (brownfield) as customers’ operating budgets tightened.
Historically, CSE reaped c.S$40m (US$30m) of flow work per quarter from the Americas but we observed a weaker trend of c.S$28m (US$21m) per quarter in 1H16. Asia Pacific revenue (35% of group revenue) rose 5% qoq lifted by infrastructure, although we had hoped for faster growth. Some infrastructure projects were deferred to 2H16.

2Q16 EBIT margin was strong at 9.7% (1Q16: 7.6%), stemming from the 28.9% EBIT margin achieved by mining & minerals as a result of project completion and overprovision for closing-out costs previously.
Infrastructure EBIT was 12.9% in 2Q16 (vs. guided 15%) as it booked one-off restructuring costs of S$700k (US$520k) for the streamlining of its operations in Australia. Excluding this, infra EBIT margin in 2Q16 would have come in higher at 17%.

In view of hurricane season (started in Jun 16) and lower flow projects from Americas YTD, we lower total order win expectations for FY16 from S$400m to S$350m. CSE won S$86m orders in 2Q16 (S$65m, brownfield), below its guidance of S$70m-80m/quarter.
Infrastructure greenfield pipeline for 2H16-1Q17 is still strong, S$40m-50m from ERP 2, c.S$30m from Australia rail and airport projects. We forecast FY17-18F gross margins of above 30% (FY15: 29%).

Net cash stood at S$49m (US$36m) at end-2Q16, with positive operating cash flow of S$22m (US$17m).
Given the strong cash position, management guides for FY16 DPS of at least S$0.0275, similar to FY15. This translates into 6% dividend yield.

We cut EPS by 9-14% for FY16-18F to reflect lower revenue from the Americas. Our target price is lowered from S$0.57 to S$0.52, still based on 9.7x FY17 P/E (1 s.d. below its 5-year mean).
We continue to like CSE for its strong balance sheet, cash flows, recurring earnings and shift towards higher-margin infrastructure projects.
Key risks include slower than expected orders and execution hiccups.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-08-11

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.520 Down 0.570