CSE Global - CIMB Research 2017-05-15: 1Q17 Orders Up, But Execution Largely In 2H17F

CSE Global - CIMB Research 2017-05-15: 1Q17 Orders Up; But Execution Largely In 2H17F CSE GLOBAL LTD 544.SI

CSE Global - 1Q17 Orders Up; But Execution Largely In 2H17F

  • 1Q17 net profit of S$3.0m accounted for 13% of our/consensus FY17F net profit (S$23.8m/S$22.5m); a slight miss due to lower revenue and GPM, in our view.
  • Contract intake spiked to S$117.9m (4Q17: S$57.7m), mainly on large wins in oil & gas segment. But project executions are guided to be back-loaded to 2H17F-18F.
  • Order backlog at end-1Q17 up at S$204.2m (vs. end-4Q16’s S$163.1m).
  • We cut FY17F-19F EPS by 4.7-12.5% as we opt to be conservative on the contract execution timeline and GP margins.
  • Maintain Add with lower TP based on 12x FY18F P/E (5-year historical mean).

Revenue and GPM margins lower than expected in 1Q17 

  • 1Q17 net profit (-51.3% qoq/-45.5% yoy) was guided to be seasonally weaker due to the low order backlog at end-16. However, we still deem revenue (-11.5% yoy, -4.8% qoq) a miss due to slippages in contract execution, and more importantly, notice lower reported GP margins of 29.2% recognised (vs. our expected 30%) for the quarter.

1Q17: infrastructure sector helps; oil & gas still the weak link 

  • The oil & gas (O&G) division continued to see weakness, with its EBIT margin sliding to 2.6% (vs. 6.1%/10.1% in 1Q16/4Q16), despite revenue stabilising at c.S$50m in 1Q17/4Q16. 
  • The infrastructure segment’s revenue growth (+48% yoy/+35% qoq) mitigated the slight dip in its EBIT margin to 13.6% (vs. 16.3%/14.9% in 1Q16/4Q16).
  • The sluggish O&G division was the main reason for the zero EBIT reported by ‘The Americas’ division.

Respite in order wins, but execution of large contracts only in 2H17 

  • Contract intake spiked to S$117.9m, driven by a S$42m O&G contract in Mar, forming c.33.7% of our S$350m FY17F forecast. This trumps the order intake rate of the past eight quarters (c.S$57.7m-98.4m). However, such large contracts are guided to only contribute meaningfully from 2H17, behind our estimated execution timeline. Order backlog at end-1Q17 was S$204.2m (c.2014 levels). 
  • Management expects more large project wins in FY17 but again, such revenue contribution is likely meaningful in FY18F.

Balance sheet stays healthy; 2.75 Scts DPS is intact 

  • 1Q17 ended with a net cash position of S$55.8m (vs. 4Q16’s S$70.2m) largely due to acquisition costs of S$8.2m in 1Q17. 
  • Management guided that more cash could be drawn-down with large projects kick-starting, but that should not impact the DPS of 2.75 Scts committed for the year.

Opting to be conservative, lower FY17-19F EPS by 4.7-12.5% 

  • While we are positive on the continued surge in order wins in 1Q17, we opt to be conservative on the execution timeline of the projects and the expected GP margins going forward. Hence, we trim our FY17F revenue by 3.7% but raise FY18-19F revenue by 5-5.5%. 
  • We also reduce our GPM forecast to 29% for FY17F-19F (from 30%). As such, we now expect net profit of S$20.6m in FY17F (close to its guidance that it can repeat the S$21.1m net profit of FY16) and S$23.9m-24.6m in FY18-19F.

Maintain Add, lower target price to S$0.56 

  • Our lower forecasts lead to a lower target price of S$0.56/share, based on unchanged FY18F P/E of 12x (5-year average mean) but we like CSE for its 
    1. healthy balance sheet that gives it the ability to ride through volatile times; and 
    2. guaranteed DPS of 2.75 Scts/share which implies a dividend yield of 5.5%. 
  • Downside risks are lower-than-expected contract wins and margins.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-05-15
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.56 Down 0.590