CSE Global - OCBC Investment 2017-05-12: Still Impacted By O&G Sector

CSE Global - OCBC Investment 2017-05-12: Still Impacted By O&G Sector CSE GLOBAL LTD 544.SI

CSE Global - Still Impacted By O&G Sector

  • Strong new orders received in 1Q17.
  • Positive operating cash inflow.
  • Earnings to be back-loaded in 2H17.

1Q17 below expectations 

  • CSE Global Ltd’s (CSE) 1Q17 PATMI missed expectations as it plunged 45.5% YoY to S$3.0m and formed only 13.5% of our FY17 forecasts.
  • 1Q17 revenue fell 11.5% YoY to S$74.5m due to lower contributions from Europe/Middle-East/Africa (-26.3%) and the Americas (-21.5%) regions, but offset by 14.6% growth in Asia-Pacific region. 
  • While CSE’s 1Q17 gross margin improved 0.6ppt to 29.2%, EBIT fell 35.7% YoY to S$4.1m, dragged by the Americas region as a result of delays in award of project orders and lower margins achieved due to competition. 
  • By industry, CSE’s O&G segment 1Q17 EBIT dropped 68.2% YoY to S$1.4m. However, CSE’s new order intake for 1Q17 jumped 57.3% YoY to S$117.9m as it secured two major deepwater offshore O&G projects valued at S$42m, ending the quarter with a solid outstanding order book of S$204.2m.

Look to FY18 for better performance 

  • Looking ahead, we expect CSE to only recognize revenue from the two major projects from 3Q17 onwards to 2Q18. Therefore, FY17 earnings will likely be back-loaded in 2H17. 
  • Any new projects secured in the remaining of FY17 will likely only be recognized in FY18. Hence, earnings improvement, if any, will only occur in FY18 as CSE continues to diversify into midstream and downstream businesses, new shale formations in the U.S. as well as growth from infrastructure segment. 
  • While CSE has been reducing its dependence from the O&G sector, this segment still accounts for a substantial 71.8% of its 1Q17 revenue. Hence, earnings ahead are still likely to be affected by the O&G environment. 
  • The OPEC meeting on 25 May 17 could be crucial to provide near-term oil price stability as members decide whether to extend, or change, the oil-supply reduction agreement. However, this is unlikely to translate to an immediate rebound in orders.

Supported by 5.6% forward dividend yield 

  • On aforementioned reasons, we cut our FY17F PATMI by 8% but raise our FY18F PATMI by 2%. Consequently, our FV (9.0x FY18 PER) increases from S$0.44 to S$0.45. Maintain HOLD.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2017-05-12
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.450 Up 0.440