CSE Global - OCBC Investment 2016-10-12: Staying cautious despite improved oil outlook

CSE Global - OCBC Investment 2016-10-12: Staying cautious despite improved oil outlook CSE GLOBAL LTD 544.SI

CSE Global - Staying cautious despite improved oil outlook

  • Russia backing OPEC production freeze.
  • Solid balance sheet helps.
  • Maintain HOLD.

Russia supporting OPEC to reverse oil price slump 

  • Russia earlier this week said that it will support a proposal by Organization of the Petroleum Exporting Countries (OPEC) to limit output in a bid to reverse the slump in oil prices. 
  • OPEC is looking to agree to cut around 700,000 barrels/day at its meeting on 30 Nov, which will bring its output to 32.5-33m barrels/day. 
  • As a result of this backing by Russia, Brent crude rose 2.3% to hit a 52-week high to close at US$53.14/barrel on Monday. That said, while OPEC aims to agree on the 700,000 barrels/day cut, it does not necessarily mean all of its members will stick to this agreement at the meeting in Nov 16. 
  • Furthermore, the differences between Iran and Saudi Arabia could potentially impede any agreement by OPEC in the Nov meeting. Hence, Russia’s support will have little impact if an agreement, whether it is a production freeze or cut, is not reached.

Earnings to remain soft as we await stability over oil price 

  • Looking ahead, we expect orders from CSE Global Ltd’s (CSE) Oil & Gas (O&G) customers to continue tapering down but growth in infrastructure projects to help mitigate this weakness from the O&G industry. 
  • With oil price volatility becoming a norm, we believe the number of greenfield projects is unlikely so see a substantial increase until oil prices have stabilized and if major oil producing countries stick to their agreement, if any. As a result, we think the slowdown in spending within the O&G industry will persist until oil majors see reasonable stability in oil prices. 
  • All said, we remain comforted by CSE’s strong operating cash flows and solid balance sheet, which will help it through this volatile period.

Supported by 6.6% forward dividend yield 

  • As we keep our forecasts unchanged, maintain HOLD on CSE, with the same FV of S$0.43
  • Recall that CSE guided that it intends to keep its dividends for FY16 similar to FY15 at 2.75 S- cents. 
  • Also, note that CSE will be announcing its 3Q16 results on 9 Nov after trading hours.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2016-10-12
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.43 Same 0.430