CSE Global - CIMB Research 2017-03-12: Heralding the return of contract wins

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CSE Global - Heralding the return of contract wins

Last week, CSE announced that it had won two deepwater offshore contracts worth S$42m (US$30m). It guided for the projects to be completed in FY17-18F.
We are extremely positive on the wins but unsurprised, as management implied earlier there could be a return in contract wins in FY17F.
Maintain Add and target price based on FY18 P/E of 12x (historical 5-year mean).

CSE announced that it had won two deepwater offshore contracts valued at c.S$42m (US$30m) for integrated control systems to be executed in the Gulf of Mexico.
We are extremely positive on the wins as it signifies the return of major oil & gas contracts, post-contract drought in 2016.
In the announcement, the company stated the contracts would be executed in FY17-18F.

There was no mention of the specific deepwater projects that CSE won. Based on industry sources, we understand there are at least 2-3 projects in the Gulf of Mexico that were given the “good-to-go” at end-16/beginning-17 by players that include Anardarko, Shell and BP. We view such news as encouraging signals for 2017.

The wins boost CSE’s oil & gas segment order backlog to c.S$117.2m (vs. S$75.2m at end-16) and bring the group’s total order backlog to S$205.0m (vs. S$163.1m at end-16).
In 2016, order intake for the oil & gas segment narrowed by 34% to S$194.6m (vs. S$295.0m in 2015), becoming the main drag on the group’s earnings.
Other divisions did better, as the mining & mineral and infrastructure divisions registered jumps of 182% (from S$11.3m in 2015 to S$31.9m in 2016) and 35% (from S$44.5m in 2015 to S$60.1m in 2016), respectively, in their order intake for 2016.

We estimate FY17F order intake of c.S$350m, comprising S$60m-70m brownfield wins per quarter and the remaining S$70m-110m greenfield projects by the oil & gas and infrastructure divisions.
Given these initial greenfield wins of c.S$42m (i.e. 38- 60% of our FY17F greenfield forecast), we believe there is a high possibility that CSE will outperform our 2017F order intake estimate. However, we opt to be conservative, for now as the year has just begun. In comparison, 2016 total order intake was S$286.6m.

We maintain our EPS forecasts, Add call and target price (S$0.59), still based on FY18 P/E of 12x (historical 5-year mean).
CSE continues to be one of our sector favourites for its healthy balance sheet (net cash of S$70.2m at end-16) that gives it the ability to ride through volatile times.
Although FY16 net profit was weaker yoy, management upheld DPS of 2.75Scts (yield of 5.6% p.a.). It has guided that it will continue to do so in FY17F.
Downside risks are lower-than-expected contract wins and margins.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-03-12

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