CSE Global - CIMB Research 2018-04-16: Ushering In New Dynamic; Await Synergies To Re-rate

CSE Global - CIMB Research 2018-04-16: Ushering In New Dynamic; Await Synergies To Re-rate CSE GLOBAL LTD 544.SI

CSE Global - Ushering In New Dynamic; Await Synergies To Re-rate

  • CSE's new major shareholder Serba Dinamik Holdings heralds new contract opportunities but more details are needed for further earnings re-rating. SDH announced that it acquired a c.25% stake for a total consideration of S$57.7m (0.45 Scts/share). The valuation prices CSE at 15.4x/13.8x FY18/FY19F P/E.
  • Serba Dinamik Holdings (SDH)’s main presence is in Malaysia and the Middle East and it provides engineering solutions mainly to downstream oil and gas (O&G) and power generation industries.
  • We stay lukewarm on CSE till large-scale contracts pick up or margin trends improve.
  • We keep our HOLD call with a higher target price of S$0.44, based on 13.5x CY19F P/E (historical 5-year mean).

New markets in the offing but firmer details needed for re-rating 

  • We believe collaboration with the new shareholder opens CSE to downstream O&G, power and utilities contracts from the Middle East and Malaysia, assisting with order book replenishment. However, downstream/onshore margins may be lower (SDH’s GP margins are typically lower at c.16-18% vs. CSE’s 26%). 
  • We await further details on collaborative strategies before making any earnings changes. 
  • CSE is currently trading at FY18F/19F P/E of 14.7x/13.1x vs. SDH’s consensus FY18F/19F P/E of 13.0x/11.0x.

Serba Dinamik is new substantial shareholder with c.25% stake 

  • According to Serba Dinamik Holdings (SDH)’s announcement on Bursa Malaysia, it bought over 128.2m of CSE shares from eight shareholders for a total consideration of S$57.7m, translating into 0.45 Scts/share (13.8x FY19F P/E). 
  • SDH’s share purchase marks the exit of founder Tan Mok Koon. 
  • Bloomberg consensus seems confident on SDH, with an overall BUY call. Post this, we believe SDH will ask for board seats: CSE has an AGM on 19 Apr.

An engineering services provider; cum asset owner 

  • Serba Dinamik (SDH) is a Petronas-licensed global integrated engineering company. Its main revenue stream is its O&M division for rotating equipment in downstream and upstream industries.
  • It also performs engineering, procurement, construction and commissioning (EPCC) for onshore O&G and power generation industries and is an asset owner for several utility assets. 
  • The majority of its revenue is from the Middle East (c.59% of FY17) and Malaysia (31.7% of FY17).

Tapping CSE’s geographical footprint and expertise 

  • According to SDH, the acquisition is part of its overall strategy to
    1. expand its geographical footprint in the US, Mexico, Australia and New Zealand,
    2. offer EPCC and O&M to CSE’s O&G client base,
    3. strengthen its information technology (IT) segment by potentially integrating CSE’s various IT solution platforms, and
    4. leverage CSE’s knowhow in incinerator technology for the environmental industry and, thus, strengthen the SDHB group’s capabilities in its sewerage treatment plan projects.

Maintain HOLD, with a higher target price of S$0.44 

  • The tie-up presents many potential contractual opportunities for CSE but we believe it could be premature to revise our earnings estimates now. We maintain our HOLD call but lift our target price to S$0.44, now based on 13.5x CY19F P/E (close to historical 5-year mean) vs. 12x previously as we believe the market may view SDH’s acquisition price as the nearest fair valuation. 
  • Re-rating catalysts are higher-than-expected contract wins and better margins. 
  • Downside risks are lower contract wins and margins.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-04-16
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.44 Up 0.390