CSE Global - CIMB Research 2018-01-12: Valuations Ahead Of Earnings

CSE Global - CIMB Research 2018-01-12: Valuations Ahead Of Earnings CSE GLOBAL LTD 544.SI

CSE Global - Valuations Ahead Of Earnings

  • Current valuation (CY18F/CY19F P/Es of 14.2x/11.8x) prices in an earnings recovery. Lack of large-scale contracts and declining margin pose earnings downside risks.
  • “Housekeeping exercises” guided to happen in 4Q17F (results due to be released in Feb 18) could lead to impairments and provisions moving ahead.
  • CSE’s safer balance sheet may be one of the reasons for its recent share price outperformance vs. peers; but better clarity may only emerge post 4Q17 results.
  • We see opportunity to take profit. Maintain REDUCE and Target Price of S$0.31, based on 10x CY19F P/E (close to 1 s.d. below 5-year mean).

Too early to expect normalised profits 

  • CSE is trading at 14.1x CY18F and 11.8x CY19F P/Es, which we believe prices in an earnings recovery ahead. 
  • Current valuations imply improvement in GP margins and core net profit at its long-term averages (over FY09-FY16) of c.30% and c.S$30m, respectively. However, with FY18-19F net profits settling around S$15m, we believe its risk/reward dynamics are skewed to the downside.

A weak ending to a tumultuous year 

  • “Housekeeping exercises” were guided for 4Q17 (results are due to be released in Feb 18) and management intends to review the fair value of its business units and viability of its accounts receivables. This could result in impairments and provisions, in our view.
  • Overall, 9M17 net profit narrowed by c.40% to S$8m (vs. 9M16: S$14.0m) due to: 
    1. execution delays for the deepwater contracts won in 1Q17; and
    2. compressed GP margins for the oil & gas segment as the tendering environment turned competitive.

Small players marginalised 

  • The lack of sizeable greenfield projects since 1Q17 reaffirmed our view that small players like CSE could be marginalised in a competitive environment. The last major greenfield contracts were secured in 1Q17 at c.S$42m (US$30m), for offshore integrated control systems in the Gulf of Mexico. 
  • We believe the anaemic margin trend for the oil & gas segment, due to weak operating leverage, is likely to continue until 2019F.

Hit by one-off cash outflow in 2017; FY18F DPS may be affected 

  • CSE was hit by a one-off S$16.8m settlement charge in 3Q17, which left its end-Sep 17 net cash position at S$20.6m (vs. S$35.2m at end-Jun 17 and S$70.1m at end-Dec 16).
  • Management said that it stands by its FY17F DPS guidance of 2.75Scts, implying a 1.5Scts DPS in 4QFY17F. Whilst the company would still be in a net cash position, we believe cash preservation mode for working capital could pressure our estimate of 2.75Scts FY18F DPS. 
  • We will review our estimates post its upcoming 4Q17 results.

Maintain Reduce and TP of S$0.31 

  • We reiterate our REDUCE call and Target Price of S$0.31, based on CY19F P/E of 10x (close to 1 s.d. below its 5-year mean). 
  • CSE undoubtedly has a safer balance sheet vs. peers, hence its recent outperformance. But we believe better entry points could come post its upcoming 4Q17 results review. 
  • Possible de-rating catalysts are lower-than-expected contract wins and lower forward DPS. 
  • Upside risks to our call are higher contract wins and margins.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-01-12
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.310 Same 0.310