CSE Global - CGS-CIMB 2018-05-10: 1Q18 Beat On Higher Margins

CSE Global - CGS-CIMB 2018-05-10: 1q18 Beat On Higher Margins CSE GLOBAL LTD SGX: 544

CSE Global - 1Q18 Beat On Higher Margins

  • CSE’s 1Q18 core net profit of S$4.7m was above expectations at 31% of our/consensus FY18 estimates on higher EBIT margin of 8.5%.
  • Order intake was S$68.9m, driven by the oil and gas (O&G) and infrastructure divisions. Order backlog was S$148m at end-1Q18 (end-17: S$175.0m).
  • We raise our FY18-20 EPS forecasts to reflect better margins. We upgrade from Hold to ADD with higher Target Price of S$0.50. 
  • Downside risks are mitigated in the near-term. New greenfield projects and higher margins are potential catalysts.

1Q18 core net profit up higher GPM

  • CSE’s 1Q18 core net profit was up 57.7% y-o-y on higher revenue (+23.7%) and EBIT margins of 8.5% (vs. 1Q17: 5.5%). This was despite higher tax expense of 28% vs. (1Q17: 24%). 
  • The main driver was the better EBIT margins of the infrastructure segment at 15.2% (vs. 1Q17: 13.6%) and oil and gas segment at 6.1% (vs.1Q17:2.6%). We excluded net forex gains/losses in our core net profit calculation.

Order flow slightly down; still awaiting greenfield projects

  • CSE’s 1Q18 order win of S$68.7m was down 41.6% y-o-y due to the lack of greenfield order wins and some delay in O&G (S$49.4m) and infrastructure segment (S$16.3m) wins to 2Q18F; according to management. 
  • Management guides for order wins to stabilise at S$75m/quarter in 9M18F, but larger greenfield O&G contract awards may only emerge in the latter part of FY8F. Order backlog was S$148.6m at end-1Q18 (end-FY17: S$175.0m).

Narrower net cash position, but should improve

  • CSE’s Net cash position narrowed to S$5.0m as at end-1Q18 (vs. S$15.5m at end-17) but management expects cash pile to increase later as there are several large projects that will reach billing milestones in 2Q-3Q18.

Upgrading FY18-20F earnings

  • Management believes gross profit margins (GPM) have stabilised given less competition in the global arena. Hence, we lift our GPM to 26.8% p.a. (vs. 26.2-26.6% previously). We also lift our EBIT margin to 6.4% p.a. (vs. 4.6-5% previously on account of better operating leverage). 
  • We trim FY18-20F revenue to be conservative given greenfield orders have yet to pick up. Overall, our FY18-20F EPS forecasts increase by 7.8-22.4%.

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. 
  • Downstream/onshore margins may be lower (Serba Dinamik’s (SDH’s) GP margins are typically lower at c.16-18% vs. CSE’s 26%), but contract volume growth is a welcome change. 
  • 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.

Upgrade to ADD, Target Price of S$0.50

  • Our increased forecasts lead to higher Target Price of S$0.50 based on 13.5x CY19F P/E (close to historical 5-year mean). We have turned more positive on CSE as margins seem to have improved. Moreover, with the current recovery, the company could be able to maintain its DPS of 2.75 Scts. Consequently, we upgrade our call from Hold to ADD. 
  • Re-rating catalysts are higher-than-expected contract wins and better margins. 
  • Downside risks are lower contract wins and margins.

Cezzane SEE CGS-CIMB | LIM Siew Khee CGS-CIMB | https://research.itradecimb.com/ 2018-05-10
SGX Stock Analyst Report ADD Upgrade HOLD 0.50 Up 0.440