CSE Global - CIMB Research 2017-08-11: 2Q17 Headwinds Persist, Continual Execution Delays

CSE GLOBAL LTD 544.SI

CSE Global - 2Q17 Headwinds Persist, Continual Execution Delays

CSE Global's soft 1H17 core net profit of S$6.1m (31.8%/30% of our/consensus) was within expectations but we were taken aback by company guidance on yoy weaker 2H17F.
Slow large contract execution and compressed EBIT margin (5% in 2Q17 vs. our estimate of 7%) were reasons for the 2Q underperformance.
Interim DPS of 1.25 Scts was announced and FY17F DPS of 2.75 Scts reiterated.

FY18F-19F DPS is contingent on forward operating performance, in our view.
We reduce FY17/18/19F EPS by 23.2/16.4/16.4% as we lower GPM to 27.0%/27.5%/27.5% (from 29% p.a.). Maintain Reduce call with lower TP of S$0.32.

CSE Global's 1H17 core net profit narrowed to S$6.1m (-44.9% yoy), despite resilient revenue (+1.0%) with lower EBIT margin from the oil and gas (O&G) division.
While we expected the weak 1H17 net profit, we were surprised by EBIT margin compression to 5.0% in 2Q17 (vs. our estimate of c.7.0% and 9.8%/5.5% in 2Q16/1Q17) due to the O&G division barely breaking even (intensifying competition) and offsetting the better performance of the infrastructure division (15.5% EBIT margin in 2Q17 vs. 11.6%/13.6% in 2Q16/1Q17).

2Q17 contract intake of S$90m mainly comprised flow projects, bringing 1H17 order intake to S$208.7m (60% of our S$350m FY17F forecast). Order backlog as at end-2Q17 was stable qoq (1Q17: S$204.2m) but it is missing large greenfield contracts to fuel FY18F pipeline, in our view.
Management explained that it did not win certain projects and that heightened enquiries have not led to O&G awards. Management guided there are still opportunities in the infrastructure segment but they are not of significant value.

Net cash position narrowed to S$35.2m as at end-2Q17 (vs. S$55.8m at end-1Q17).
An interim dividend of 1.25 Scts was announced in 2Q17 and management reiterated its FY17F DPS guidance of 2.75 Scts. We highlight that the payout of the one-off settlement charge of S$16.8m will only be effected in 3Q17.

Management explained that the S$16.8m settlement pertained to lawfully rendered oilfield services for a project in Iran in FY12-13, of which payments to suppliers in Europe were unfortunately denominated in US$.
Management admitted that there were some lapses in controls with regards to the transaction and moving forward, has applied appropriate measures to prevent this from reoccurring.

Management guided that it expects to report weaker net profit for 2H17F (vs. 2H16 net profit of S$10.5m), as execution on large projects won in 1Q17 continue to be delayed from the initial mid-year mark to end-3Q17.
In our view, gross margins (GPM) in 2H17F are unlikely be higher than the 25% in 2Q17 unless variation orders emerge.
Given the lower guidance, we lower FY17/18/19F GPM to 27.0%/27.5%/27.5% (from 29% p.a. previously). This cuts our FY17/18/19F core EPS by 23.2%/16.4%/16.4%.

While we like CSE for its stable net cash position, the dip in EBIT margins, recent settlement news and slower large contract win trajectory cast a shadow on its future earnings prospects.
FY17F DPS is intact, but lower FY18-19F earnings could pressure future dividends, in our view.
Reiterate Reduce and lower our TP to S$0.32 (from S$0.39), still based on 10x FY18F P/E (1 s.d. below past 5-year mean).
Upside risks are higher contract wins and margins.
A possible de-rating catalyst is lower DPS in the future.

Cezzane SEE CIMB Research | Lim Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-08-11

CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.32 Down 0.390