CSE Global - CIMB Research 2016-11-11: 3Q16 results ~ Down but not out

CSE Global - CIMB Research 2016-11-11: 3Q16 results ~ Down but not out CSE GLOBAL LTD 544.SI

CSE Global - 3Q16 results ~ Down but not out

  • 9M16 net profit of S$15m was broadly in line at 64% of our FY16F as we project a stronger pick-up in 4Q16 with more higher-margin project recognition.
  • Weaker 3QFY16 EBIT margins were largely due to sluggish activity levels in the oil and gas segment.
  • Cut FY17-18F EPS by 15-23% as we opt to be conservative given the sluggishness in the oil and gas segment.
  • Maintain Add call but at a lower target price of S$0.47 on the back of our lower FY18F EPS but still based on 9.7x FY18F P/E (roll forward from FY17F P/E).

Revenue steady… 

  • 3Q16 revenue grew 9% qoq to S$81m, dominated by Asia Pacific (S$31m) and The Americas (S$39m). 
  • Oil and gas revenue remained steady, accounting for c.70%, but mining & mineral revenue surged to S$6.7m in the quarter, likely due to large projects secured in 2QFY16.

… but margin affected by weaker oil and gas 

  • The 3Q16 EBIT margin of 6.9% was lower (from 10% qoq and 11% yoy) largely due to the mining & mineral segment’s just breaking even and a fall in oil and gas segment EBIT margins. The infrastructure division’s EBIT margin was still strong at 14.0% but was unable to mitigate the weaker EBIT margins from the oil and gas and mining units.
  • Geographically, EMEA registered the highest margin drop qoq, largely as 2Q16 saw higher margins from the reversal of overprovided costs once a project was completed.

Order intake weaker qoq; S$179m brought to 4Q16 

  • 3Q16 order intake came in at US$70.8m (from 2Q16 of S$83.2m), largely from infrastructure jobs (S$17.0m). 
  • On a positive note, oil and gas saw an uptick in order intake of S$49.6m from S$39.5m in 2Q16. 
  • Overall, 4Q16 starts with an outstanding order backlog of S$179m. 
  • Management guides that 75% of such contracts will flow to FY17. The oil and gas sector dominates at 46% of the order backlog, with infrastructure making up 42%.

Cut FY17-18F forecasts to account for lower margins ahead 

  • We reduced our FY17-18F gross margins as we are mindful of potential margin erosion given the continual weakness in the oil and gas sector. 
  • We applaud management’s ability to grow its infrastructure and mining & mineral segments but for the near term we opt to be conservative as the oil and gas sector does make up the bulk of CSE’s revenue. 
  • Our EPS forecasts are reduced by 15% for FY17 and 23% for FY18.

Strong balance sheet says it all; CSE stays committed to its DPS 

  • Despite the sluggish margin outlook, we still favour CSE for its strong balance sheet. Net cash stood at S$52.9m as at end-3Q16 whilst operating cash flow was a positive S$57.3m. 
  • Management guided that any acquisitions will likely be minimal and it is committed to S$0.0275 DPS for FY16-17. This translates into a dividend yield of 6.6%.

Staying confident; maintain Add 

  • CSE still offers healthy ROE of 9.3%, dividend yield of 6.6%, steady cashflow generation and a healthy balance sheet despite the flattish earnings outlook. As such, we still favour the stock. 
  • Key downside risks will be further margin erosion from the oil and gas sector.
  • Upside risks are better margins from infrastructure and mining & mineral projects

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-11-11
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.47 Down 0.520