CSE Global - CIMB Research 2018-02-26: 4Q17 Earnings Recovery Priced In

CSE Global - CIMB Research 2018-02-26: 4Q17: Earnings Recovery Priced In CSE GLOBAL LTD 544.SI

CSE Global - 4Q17: Earnings Recovery Priced In

  • CSE Global's FY17 core net profit (excluding one-off expenses of S$55.1m) of S$11.2m was within expectations at 104.7% of our estimate (S$10.7m).
  • 4Q17 DPS of 1.5Scts (1.0Scts interim/0.5Scts special) took FY17 DPS to 2.75Scts; within management’s commitment and our expectations.
  • Order intake increased to S$381.9m, buoyed by flow of contracts in both oil and gas (O&G) and infrastructure divisions. Order backlog was S$175m at end-4Q17.
  • Guides for stronger contract flow in FY18, with greenfield only from 2H18.
  • Upgrade to HOLD with higher Target Price of S$0.39. 
  • Downside risks are mitigated in the near-term. New greenfield projects and a higher margins are needed catalysts.

FY17 core net profit at S$11.1m; ex one-offs of S$58.1m 

  • FY17 core net profit fell 47% y-o-y despite higher revenue (+14%), unsurprisingly given the 
    1. delay in executing its deepwater contracts won in 1Q17, and
    2. compressed O&G gross margins as the tendering environment turned competitive. 
  • S$58.1m worth of one-offs were booked in FY17: S$16.8m settlement costs in 2Q17, and S$41.7m in impairments in 4Q17 (S$11.7m for receivables, S$26.2m for goodwill, S$3.8m for deferred assets and others). We also excluded net forex gains/losses in our core net profit calculation.

Order flow improved 

  • CSE Global's FY17 order win of S$381.9m, up 33.3% y-o-y, was driven by its O&G (S$258.1m) and infrastructure segments (S$90.5m), with the O&G segment locking in S$42m of deepwater works in 1Q17. 
  • Order backlog was at S$175m at end-4Q17 (vs. FY16: S$163.0m).

Still awaiting greenfield projects for FY18F; c.26% GPM for now 

  • Management still guides for the flow of order wins to stabilise at current levels (~S$75m-85m per quarter) in FY18F, but larger greenfield O&G contract awards may only emerge in 2H18F. It believes gross profit margins (GPM) of around 26% are also “the new norm” as there is now higher weightage for onshore O&G work, which carry lower GPMs. 
  • Given the better order wins ahead, we lift our FY18F/FY19F revenue by 14.0%/4.2% and net profits by 11.7%/4.1%. We also introduce our FY20 EPS forecast of 3.4Scts.

Narrower net cash position; tweaking down FY18-19F DPS 

  • Net cash position narrowed to S$15.5m as at end-4Q17 (vs. S$70.2m at end-4Q16), largely due to the one-off S$16.8m settlement charge in 2Q17 and higher working cap to fund current year’s projects. 
  • Whilst management kept to its FY17 DPS guidance of 2.75Scts, we note that 0.25Scts was deemed a special dividend. Given the narrower net cash position, we reduce our FY18-19F DPS to 2.5Scts (vs. 2.75Scts previously).

Upgrade to HOLD; earnings recovery priced in 

  • We upgrade our call on the stock to HOLD (from Reduce) with a Target Price of S$0.39 (from S$0.32), now based on a higher CY19F P/E of 12x (from 10x), -0.5 s.d. of its 5-year mean, as we believe the downside risks on the stock are largely mitigated. 
  • The company still has to
    1. win large greenfield contracts,
    2. see GPM recovery, or
    3. maintain DPS at FY17's level for us to be more bullish on its share price. 
  • Upside risks to our call are higher contract wins, margins and DPS; the contrary would could de-rate the stock.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-02-26
CIMB Research SGX Stock Analyst Report HOLD Upgrade REDUCE 0.39 Up 0.310