CSE Global (CSE SP) - UOB Kay Hian 2018-05-10: 1Q18 Results Above Expectations; Yield Remains Very Attractive At 6.3%

CSE Global (CSE SP) - UOB Kay Hian 2018-05-10: 1q18 Results Above Expectations; Yield Remains Very Attractive At 6.3% CSE GLOBAL LTD SGX: 544

CSE Global (CSE SP) - 1Q18 Results Above Expectations; Yield Remains Very Attractive At 6.3%

  • CSE’s 1Q18 results came in above expectations with net profit surging 90% y-o-y to S$5.7m, driven by stronger y-o-y sales growth of 23.7%.
  • 1Q18’s order intake fell 41.5% y-o-y but this was due to a deferment in some new orders to 2Q18.
  • Our investment thesis remains intact as gross margin was higher than expected at 26.8% in 1Q18. Maintain BUY with a higher target price of S$0.61.
  • At the CSE's current price, the stock offers a generous 2018 yield of 6.3%.



RESULTS

  • 1Q18 results above expectations. CSE Global (CSE) reported a strong set of results with headline net profit rising 90% y-o-y in 1Q18 to S$5.7m, driven by stronger revenue growth and a forex gain of S$1.3m. Core net profit came in at S$4.4m, which was 10% higher than our expectation of S$4.0m for 1Q18. Revenue rose by 24% in 1Q18 to S$92.2m, driven by stronger performance from the infrastructure and oil & gas segments. Gross margins came in at 26.8% for 1Q18 which surprised us on the upside, as full-year gross margins for 2017 were only 26%. 
  • The group continues to keep costs low, as despite a 24% increase in sales for 1Q18, operating expenses grew by only 2% for the period, which reflects higher labour utilisation and better cost efficiencies.
  • New orders received fell but there is no reason for alarm. The group received new orders of S$69m for 1Q18, which was a 41.5% drop y-o-y. However, we expect a pick-up in new order wins for 2Q18 as we understand that due to delays, some new order wins have been deferred to 2Q18. The group ended 1Q18 with an outstanding orderbook of S$149m.
  • Expect cash flows to pick up in 2Q-3Q18. CSE has highlighted that several large projects will reach billing milestones in 2Q-3Q18, and the group is confident of achieving a positive operating cash flow for 2018.


STOCK IMPACT

  • Recovery and stabilisation in gross margins gives us confidence. For 2017, CSE saw gross margins tumble to a low of 26%. The recovery in gross margins for 1Q18 to 26.8% is a key theme in our investment thesis as we expect the higher-margin infrastructure segment to form a larger percentage of total sales in 2018, resulting in a positive sales mix and gross margins improvements in the brownfield and maintenance oil and gas segment. 
  • The recovery in gross margins for 1Q18 bodes well for the remainder of the year despite the first quarter typically being a seasonally weak quarter.
  • New substantial shareholder is a synergistic fit for CSE. CSE will continue to support and service its existing customer base and explore opportunities in the market together with Serba Dinamik (Serba).


EARNINGS REVISION

  • We raise our 2018-20 net profit estimates by 6.9%, 6.1% and 1.8% respectively as we increase our gross margin assumption by 0.3% for 2018 and lower our administrative cost assumption.


VALUATION/RECOMMENDATION

  • Maintain BUY with a higher PE-based target price of S$0.61 (previously S$0.58), pegged to peers’ average 2019F PE of 15.0x. 
  • Given Serba’s entry price of S$0.45, we believe the stock is undervalued given our expectations of a 3-year EPS CAGR of 20% in 2017-20 and PEG of only 0.5x vs peers’ 1.6x.
  • Going forward, we see potential for upside, especially in 2019, as the impact of the synergies between Serba and CSE start to flow in, which could come in the form of JVs or possible outsourcing of work from Serba. 
  • The stock offers an above-average sustainable yield of 6.3% backed by strong operating cash flow and the willingness to reward minority shareholders.


SHARE PRICE CATALYST

  • Recovery in oil prices.
  • Large oil & gas project wins.





Nicholas Leow UOB Kay Hian | Edison Chen UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-10
SGX Stock Analyst Report BUY Maintain BUY 0.61 Up 0.580



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