CSE Global - OCBC Investment 2016-11-10: 9M16 missed expectations

CSE Global - OCBC Investment 2016-11-10: 9M16 missed expectations CSE GLOBAL LTD 544.SI

CSE Global - 9M16 missed expectations

  • Declining new orders.
  • Muted outlook.
  • Strong net cash of S$73.3m.

Oil & gas segment dragged earnings again 

  • CSE Global Limited’s (CSE) 3Q16 core PATMI declined 44.1% YoY to S$4.8m on the back of a 21.6% plunge in revenue to S$81.0m due to lower contributions across all geographic regions, particularly in the oil & gas (O&G) industry on lack of large greenfield projects. 
  • 3Q16 gross margins improved 0.2ppt YoY to 29.1% due to better margins achieved from increased sales of higher margin infrastructure projects. 
  • For 9M16, PATMI from continuing operations fell 35.0% YoY to S$15.0m, and only formed 66.7% of our FY16 forecast. 
  • New orders received in 9M16 and outstanding orders as at end-9M16 fell 18.3% and 19.4% YoY to S$229.0m and S$179.0m, respectively. 
  • CSE also recorded strong operating cash inflow of S$14.9m in 3Q16 on higher billings and collections, which resulted in a strong net cash position of S$73.3m (including quoted investments).

Soft outlook to persist on volatile oil prices 

  • Looking ahead, we expect orders from CSE’s O&G customers to continue to taper, and believe the growth in higher margin infrastructure projects (19%/32% of 9M16 revenue/EBIT) ahead will unlikely be able to offset the O&G segment decline. 
  • In addition, we do not expect the number of greenfield projects to recover until oil prices have stabilized. Hence, we believe the slowdown in spending within the O&G industry will persist until oil majors see reasonable stability in oil prices, impacting CSE’s new orders outlook. 
  • That said, we are comforted by CSE’s strong net cash position and its ability to generate strong positive operating cash flow.

Maintain HOLD with lower S$0.40 FV 

  • On missed 9M16 and persistent slowdown in spending within O&G industry, we cut our FY16/17 PATMI forecast by 7.3%/14.2%, respectively. As we roll-forward to 9x FY17 PER, our FV decreases from S$0.43 to S$0.40.
  • Maintain HOLD, supported by FY16F dividend yield of 6.7%, as we expect CSE to keep its dividend at 2.75 S-cents in FY16, given its strong balance sheet.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2016-11-10
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.40 Down 0.430