CSE GLOBAL LTD
544.SI
CSE Global - Meeting Halfway; DPS Of 2.75 Scts Guided
- CSE announced it had met with shareholder Quarz Capital recently and guided a DPS of 2.75Scts for CY18, slightly higher than our forecast of 2.5 Scts.
- While we are heartened by the commitment to reward shareholders, we still believe margin expansion and new greenfield orders are integral to net profit growth ahead.
- Maintain HOLD and Target Price of S$0.39 per share based on 12x CY19F EPS.
Quarz Capital sends CSE an open letter
- On the 26 Feb 2018, shareholder Quarz Capital sent CSE Global an open letter with a series of recommendations:
- Recommendation 1: Immediate distribution of S$18m;
- Recommendation 2: Commit dividend payout of 80% with a dividend payout floor of S$12.5m;
- Recommendation 3: Target return on equity (ROE) of > 10%, which can be achieved via right-sizing CSE’s US business, integrating subsidiaries/new acquisitions, reducing corporate expenses, and targeting future growth opportunities;
- Recommendation 4: Seize growth opportunities in structural growth areas, such as the infrastructure segment in Singapore and Australia; and
- Recommendation 5: Increase alignment of board, top management and shareholders’ interests (via transparency between board and top management’s compensations with total shareholders’ return; and via increasing the proportion of share-based compensation which will vest over the mid- and long-term).
CSE guarantees dividend for 2018
- Post a meeting on the 5 Mar; CSE agreed to a few of Quarz’s recommendations.
- Firstly, it gave a clear guidance of 2.75 Scts DPS for CY18, slightly ahead of our 2.5 Scts CY18F DPS. This implies a dividend payout ratio of 94.4% vs. our core CY18F EPS of 2.9 Scts and a yield 7.4% based on the current share price of S$0.37 per share.
- Besides that, CSE committed to continue the rightsizing and turnaround of CSE’s existing US business with the goal of achieving higher profitability in 2018, and provided a long-term target return on equity of > 10%.
Still awaiting greenfield projects and uplift in GPM
- Management previously guided for the flow of order wins to stabilise at current levels (~S$75m-85m per quarter) in FY18, but larger greenfield O&G contract awards to only emerge in 2H18.
- 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.
- CSE is still in discussions with Quarz on aligning top management’s compensation with shareholders’ interest.
Maintain HOLD
- We reiterate that the downside risks on the stock are largely mitigated now and are also heartened with the DPS commitment.
- Moving ahead we look to
- more greenfield contracts, and
- signals of GPM recovery,
- We maintain our HOLD call, and estimated DPS. Our Target Price is still based on a CY19F P/E of 12x (-0.5 s.d. of its 5-year average mean).
- Upside/downside risks to our call are higher/lower contract wins, margins and DPS.
Cezzane SEE
CIMB Research
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LIM Siew Khee
CIMB Research
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http://research.itradecimb.com/
2018-03-07
CIMB Research
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