CSE Global - CIMB Research 2018-03-07: Meeting Halfway; DPS Of 2.75 Scts Guided

CSE Global - CIMB Research 2018-03-07: Meeting Halfway; DPS Of 2.75 Scts Guided 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
    1. more greenfield contracts, and
    2. signals of GPM recovery, 
    before we turn more bullish on the stock.
  • 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 | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-03-07
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.390 Same 0.390