CEI Limited - CIMB Research 2018-02-09: Dividend Yield Stock

CEI LIMITED AVV.SI

CEI Limited - Dividend Yield Stock

CEI Limited's FY17 core net profit came in 13% below our forecast largely due to higher costs.
Revenue grew 5.0% y-o-y despite the weaker US$.
CEI declared a 3.4 Scts DPS in 2H17. Together with a 4.0 Scts DPS in 1H17, the payout ratio for FY17 was close to 100%.
We cut our gross profit margin assumptions for FY18-19F due to the weaker US$ and the lack of higher-margin products in its current revenue mix.

Rolling over to FY19F, our target price is reduced to S$1.00, based on its 15-year average P/E of 10.48x (previously, 10-year average of 9.74x). Downgrade to HOLD.

CEI Limited's FY17 revenue grew by 5.0% y-o-y but gross profit margin fell slightly to 23.1% vs. 23.3% in FY16, resulting in core net profit coming in 13% below our expectations.
The key reason for the earnings disappointment was the 12.1% y-o-y increase in selling and distribution costs.
Net profit was also negatively affected by a net foreign exchange loss of S$0.7m. Net profit fell 25.9% y-o-y to S$6.5m.

CEI’s balance sheet remains strong. Short-term bank borrowings fell to S$2.0m in FY17 vs. S$2.5m in FY16.
CEI remained in a net cash position of S$1.0m as at end-Dec 2017. The lower cash balance of S$3.0m as at end-Dec 2017 was due to the S$8.0m dividend payment in FY17.
CEI declared a second and final DPS pf 0.40 Scts and a special DPS of 3.0 Scts. Coupled with the 1H17 dividends, the full-year dividend payout ratio was close to 100%.
Capex incurred in FY17 was just S$1.4m.

In terms of outlook, CEI expects to continue generating net profit in FY18F.
As at end-Dec 2017, CEI had an order book of S$55.4m (S$46.8m at end-Dec 2016), which it expects to be fulfilled by end-FY18F. The potential return of higher-margin orders from customers in the oil and gas industry would be a bonus for CEI in FY18F.

CEI’s average daily turnover is a mere US$0.02m. Its capital base is also small, at just 86.7m shares.
We opine that CEI’s board should consider a share split or bonus issue to improve liquidity. Higher trading liquidity could help CEI achieve a better spread of shareholders and improve its attractiveness to institutional shareholders.

Given the weaker US$ and the absence of higher-margin orders, we cut our FY18-19F EPS for weaker margins. We also roll over to FY19F and now value CEI at a 10.48x FY19F P/E. This P/E multiple is its historical 15-year average, which gives a better sense of the company’s long-term valuation history (previously 9.74x, 10-year average).
We also introduce our FY20F forecasts.
Potential catalysts are new order wins and stronger US$.
Key risks are a slowdown in customer orders and a weaker US$

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2018-02-09

CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 1.00 Down 1.080