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

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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).

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.

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.

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%.

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.

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%.

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

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