CSE Global - DBS Research 2016-08-12: Solid cash for higher dividends and acquisitions

CSE Global - DBS Vickers 2016-08-12: Solid cash for higher dividends and acquisitions CSE GLOBAL LTD 544.SI

CSE Global - Solid cash for higher dividends and acquisitions

  • Net profit of S$5.5m (-44% y-o-y, flat q-o-q) was 15% below estimates due to lower revenue.
  • S$22.3m in operating cash exceeded our estimates.
  • Maintain HOLD with revised TP of S$ 0.41. 



Weak order wins a concern. 

  • Continued weakness in commodity prices indicate that market conditions will remain challenging for CSE (80%+ of revenue). However, CSE receives almost half of its business from brownfield contracts, which may mitigate the impact of weak oil prices. 
  • CSE has guided for at least 2.75 Scts DPS (~6% yield) for FY16 on the back of its solid net cash position of S$49m in 2Q16.


Earnings miss but cash generation was way beyond our estimates. 

  • 2Q16 net profit of S$5.5m (-44% y-o-y, flat q-o-q) was c.15% below our estimates. There was a 32% y-o-y drop in revenue due to lower spending and project delays by oil & gas companies. CSE generated operating cash of S$22.6m, bringing 1H16 figure to S$42.3m. Order wins were weak at S$83m (-12% y-o-y) in 2Q16 while order book stood at S$187m (-22% y-o-y).
  • Management has guided for 3Q16 profit to be lower than 2Q16.
  • We cut our earnings for FY16F/FY17F by 12%/22% as visibility on new order wins remains low over the next 12-months. We project S$4m earnings in 3Q16 followed by S$7m in 4Q16.


Acquisitions could help shore up earnings. 

  • CSE is looking to expand its infrastructure business (19% of revenue in 1H16) and is evaluating potential acquisition targets in the near term, which could provide a boost to its bottom line. 
  • The company has a strong net cash position of S$49m as it generated S$42.3m of operating cash in 1H16.  

Valuation

  • We revise our TP to S$0.41, as we remove the 35% discount earlier and switch to its historical average FY16-17F PE of 9.6x due to solid net cash position of S$49m (~20% of its market cap) which is likely to be deployed for acquisitions and dividends.
  • Management has committed to at least 2.75 Scts DPS in absolute terms (same as last year) implying ~6% yield. CSE should be able to maintain its dividends for the next 3 years even if the sector outlook does not improve in our view.

Key Risks to Our View

  • Weaker-than-expected outlook. Further deterioration of outlook for the oil & gas sector could result in CSE’s FY16F/17F earnings being lower than our estimates.




Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2016-08-12
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.41 Up 0.400


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