CSE Global - CIMB Research 2017-07-24: Optimism Capped By Settlement And Lower YTD Wins

CSE Global - CIMB Research 2017-07-24: Optimism Capped By Settlement And Lower YTD Wins CSE GLOBAL LTD 544.SI

CSE Global - Optimism Capped By Settlement And Lower YTD Wins

  • CSE’s announcement of a settlement agreement with the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) caught us by surprise.
  • Arising from a potential civil liability for alleged transactions related to Iran or persons located in Iran, it leads to a one-off charge of US$12.0m in 2Q17F.
  • Net cash position will be affected but headroom still sufficient for FY17F DPS of 2.75 Scts, in our view. However, CSE could opt to be less generous in FY18-19F.
  • We are disappointed that there have been no recent large contract wins post Mar.
  • Downgrade to Reduce with Target Price of S$0.39, based on 10x FY18F P/E (-1s.d. below 5- year average).

Heartened by settlement resolution but credibility may be affected 

  • The potential civil liability arose due to alleged violations of the International Emergency Economic Powers Act (IEEPA) and the Iranian Transactions and Sanctions Regulations.
  • Following the settlement, CSE and CSE Transtel are permanently released and discharged from any and all civil liability by OFAC. CSE said that it opted to settle as litigation would prove too costly and lengthy and the outcome uncertain. 
  • We are heartened by the resolution but concerned about potential impact on CSE’s credibility.

Albeit one-off, charge strains already potentially lacklustre 2Q17F 

  • CSE guided the settlement will be recognised in 2Q17F, likely leading to a reported net loss in the coming results, in its view. We had already highlighted in our 1Q17 results review note that most of CSE’s large wins from Mar would only be recognised in 2H17F, implying soft 2Q17F performance. (See report: CSE Global - 1Q17 Orders Up, But Execution Largely In 2H17F)
  • The OFAC settlement represents another drag.

Enough headroom for FY17F DPS 

  • We think this one-off charge lowers CSE’s net cash position to S$39.2m, (vs. 1Q17’s S$55.8m), but we believe CSE still has headroom for FY17F DPS of 2.75 Scts (S$14.1m) as it is currently in net cash position, has no large near-term acquisitions planned and as we is estimate it to generate positive operating cashflow in FY17-19F. 
  • However, FY18- 19F DPS could be affected if net profit is softer-than-expected as it has no fixed dividend policy. This could be a negative as we think steady yield is one of the stock’s main pulls.

No large contract wins as yet; FY18-19F wins may be affected 

  • We note that CSE has yet to announce any large contract wins post the S$42m contract won in Mar. Our FY17F S$350m contract win assumption could be intact if 1Q17’s wins flow of S$75.9m (S$117m excluding the S$42m) is repeated in the coming three quarters but the recent fall in crude oil prices may negatively affect FY18-19F wins, in our view.
  • We cannot rule out the possibility that the settlement could have some negative impact on CSE during contract bids in the near term.

Capping optimism for now; lower core FY17-19F EPS by 7.3-17.9% 

  • We lower our FY17-19F core net profit by 7.6%-17.9% mainly as we forecast lower revenue growth for Asia-Pacific and America in the infrastructure and oil and gas segments. 
  • For 2Q17F, we estimate net profit of S$3.0m (similar to 1Q17’s), leading to 1H17F likely accounting for 32% of FY17F net profit. This is in line with CSE’s guidance that 2H17F performance will be better than that of 1H17F. 
  • CSE has guided it hopes to achieve a FY17F net profit that is similar to FY16’s S$21.2m.

Downgrade to Reduce and lower target price to S$0.39 

  • In light of the negative news and the possibility that large contract flows could be muted, we lower our P/E base to 10x FY18F P/E (1 s.d below the 5-yr mean vs. 12x, previously).
  • Coupled with our lower forecasts, our target price is now S$0.39/share (vs. S$0.56, previously) and our rating now Reduce (from Hold)
  • Upside risks are higher-than-expected contract wins and margins whilst a further downside risk is if CSE cuts forward DPS.

Cezzane SEE CIMB Research | Lim Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-07-24
CIMB Research SGX Stock Analyst Report REDUCE Downgrade ADD 0.39 Down 0.560