CSE Global - CIMB Research 2017-11-09: 3Q17 Uncertainties Persist

CSE Global - CIMB Research 2017-11-09: 3Q17 Uncertainties Persist CSE GLOBAL LTD 544.SI

CSE Global - 3Q17 Uncertainties Persist

  • CSE Global's 3Q17 core net profit of S$2m was below expectations; 9M core net profit of S$8m formed 54.7% of our FY17F estimate (S$14.6m).
  • The miss came from lower-than-expected GP margin of 25.1% (vs. CIMBe: 27%).
  • CSE has guided for losses in 4Q17F as it is undertaking a financial review exercise.
  • We expect a final DPS of 1.5Scts, as guided by the management earlier this year.
  • We reduce FY17/18/19F EPS by 27.0%/19.5%/4.0%. Maintain Reduce with a lower TP of S$0.31 on unchanged 10x P/E but on CY19F EPS (from CY18F previously).

9M17 core net profit down due to weaker oil & gas margins 

  • CSE Global's 9M17 core net profit fell 42.7% yoy to S$8.0m despite resilient revenue (+2.6%) on lower EBIT margin in the oil & gas (O&G) division. 
  • While signs of weakness were already apparent in 2Q17, we were expecting improved margins in 3Q17 with the kick-start of the large contracts won in 1Q17. However, O&G margins were still low at an estimated c.4% (vs. 3Q16: 5.7%). 
  • Management guided for margins to stay low, at least in FY18F, due to the still competitive tendering environment.

Flow orders intake improving, but large contracts still elusive 

  • 3Q17 contract intake of S$86.4m was led by the infrastructure segment, bringing 9M17 order intake to S$295.1m (84.3% of our S$350m FY17F forecast). Order backlog of S$207.6m as at end-3Q17 was stable qoq (2Q17: S$208.0m). 
  • Management said flow contracts should stabilise at current levels for now, but large greenfield oil & gas contract awards remain elusive so far in 4Q17F.

Narrower net cash position but FY17F DPS intact, in our view 

  • Net cash position narrowed to S$19.1m as at end-3Q17 (vs. S$35.2m at end-2Q17), and included a one-off S$16.8m settlement charge for a project completed in Iran in FY12-13 (mentioned in 2Q17). 
  • We believe management would stick to its earlier guidance of 2.75Scts DPS in FY17, implying 1.5Scts DPS in 4QFY17F. To recap, an interim dividend of 1.25Scts was announced in 2Q17.

Undertaking financial review of business units 

  • The group said it is undertaking a financial review of its business units to assess the fair value of its investments; it will also take a closer look at its accounts receivables. We believe this could result in impairments/provisions that could lead to a loss in 4Q17.

Lowering earnings guidance for FY17-19F 

  • To reflect near-term uncertainties, we are tempering our margin expectations. We now expect FY17F/18F/19F GP margins to be 26.1%/26.0%/26.5% vs. 27%/27.5%/27.5% previously. As such, our FY17F/18F/19F core net profit estimates fall by 27.0%/19.5%/4.0%.

Maintain Reduce 

  • Although CSE is in a net cash position, we believe the upcoming financial review could pose some near-term earnings risks for the stock. Hence, our cautious stance on its outlook. We reiterate our Reduce call with a marginally lower TP of S$0.31 (from S$0.32), as we roll forward to FY19F P/E on an unchanged 10x P/E (close to 1 s.d. below 5-year mean). 
  • Upside risks are higher contract wins and margins. 
  • A possible derating catalyst is lower-than-expected contract wins.

Cezzane SEE CIMB Research | Lim Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-11-09
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