CSE Global - CIMB Research 2017-02-25: 4Q16 Looking forward to a steady FY17

CSE Global - CIMB Research 2017-02-25: 4Q16 Looking forward to a steady FY17 CSE GLOBAL LTD 544.SI

CSE Global - 4Q16 Looking forward to a steady FY17

  • FY16 net profit (S$21.1m) made up 90% of our forecast (but 100% of consensus) due to weaker-than-expected margins, especially for the oil and gas segment.
  • Despite the weaker FY16 earnings, DPS of 2.75 Scts was maintained.
  • Management guides for a similar net profit for FY17, implying contract flows could be in recovery mode, and there could be a bottom to earnings slides, in our view.
  • Maintain Add, with a higher target price of S$0.59 on FY18F P/E of 12x (vs. 9.7x previously) as the company’s order book and earnings enter recovery mode.

Qoq profit saved by project completions 

  • Qoq revenue (S$78.3m) was down (-3.3%) on the lower number of projects executed in the quarter. 
  • But higher margins from infrastructure projects and the completion of some Asiapac oil and gas projects (hence provision write-backs) led to a better EBIT margin of 10% (vs. 3Q16: 6.9%) and net profit jumping 53.6% to S$6.2m (vs. 3Q16: S$4.0m). 
  • 4Q16 net profit was the highest in FY16.

Full-year net profit down on soft oil and gas segment 

  • FY16 net profit fell 31.2% to S$21.1m as the oil and gas segment felt the impact of low crude oil prices. 
  • New orders shrank to an historic low of S$286.6m in FY16 (from FY15: S$351m); again due to the narrowing order wins by the oil and gas segment. 
  • By geography, the Americas was the weakest link, registering revenue and EBIT drops of 31.9% and 67.8%, respectively.

Maintain DPS of 2.75 Scts 

  • Despite the weaker earnings, CSE reported a positive FY16 operating cashflow (S$58.4m) and declared a FY16 DPS of 2.75 Scts (65% of net EPS). 
  • No surprises on the DPS as it was committed last year. It guides for a similar DPS for FY17, which is not a stretch given CSE’s healthy balance sheet. 
  • It reported a net cash of S$70.2m for FY16.

Bottom found 

  • Although 1Q17 is expected to be weaker (a result of low order wins of S$57.7m in 4Q16), management believes it can repeat its FY16’s net profit performance in FY17; implying a bottom to its earnings slide. 
  • On that note, we maintain our FY17F/18F net profit forecasts of S$23.5m/S$25.3m. 
  • We introduce FY19F estimates.

Better contract flows and large greenfield projects implied? 

  • We believe that better contract flows and several large greenfield projects are needed to compensate for the low end-16 order backlog of S$163m (vs. FY15’s order backlog of S$192.7m) and achieve the FY17 net profit target. We think this is feasible given the improving crude oil prices YTD. 
  • More focus in bids for infrastructure projects, is also implied, in our view, as CSE aims to augment the segment’s performance in FY17.

Maintain Add, heartened on reversal in earnings slide 

  • We have always favoured CSE for its healthy balance sheet and attractive dividend yield (c.5.7% p.a.), and are now heartened that a bottom to the earnings slides has been found. 
  • We lift our target price to S$0.59, now based on 12x FY18F P/E (from 9.7x) as we believe it should trade at its 5-year average mean, as its order book and earnings could be in recovery mode. We previously valued it at 1 s.d. below 5-year mean for th

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-02-25
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.59 Up 0.470