CSE Global - CGS-CIMB Research 2018-07-17: 2Q18F Preview ~ Systems Still Go

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CSE Global - 2Q18F Preview ~ Systems Still Go

We forecast CSE Global 2Q18F net profit of S$4.6m (+65.7% y-o-y, -3.7% q-o-q). Net profit for 1H18F should form 50.5% of our full-year estimate.
We assume steady revenue from O&G and infrastructure projects, and overall GPM of 26.8%.
2Q18F interim DPS of 1.25Scts (1Q17: 1.25Scts) should be intact given likelihood of positive operating cashflows as large projects hit billing milestones in 2Q/3Q18F.
We maintain our ADD call and target price. We favour CSE for its net cash position, dividend yield of 6.1% and sustained earnings recovery in FY18F.

We estimate CSE 2Q18F/6M18F revenue of S$96.6m/S$188.8m (vs. 2Q17/6M17 revenue of S$85.5m/S$160m) on the back of firm contract executions by its O&G and infrastructure divisions.
We forecast O&G division 2Q18F/6M18F revenue of S$70m/S$135.9m fuelled by improved brownfield project flow and sustained execution of large greenfield contracts won in 1QFY17.
For the infrastructure division, we estimate 2Q18F/6M18F revenue of S$24.0m/S$47.7m.

In 1Q18, CSE guided that gross margins (GPMs) were stable at c.26-27%. Hence, we expect 2Q18F/6MFY18F GPM of 26.8% in 2Q18F (versus 2Q17/6MFY17 : 25.7%/27.3%).
CSE guided that the competitive environment remains keen, so it will be a bonus if near term GPMs exceed 27%, in our view.

In 1Q18, CSE mentioned that several large projects will reach billing milestones in 2Q-3Q18F. We believe this implies positive operating cashflow in 2Q18F (versus negative net operating cashflow of S$7.3m in 1Q18). SG. The group also said that it was confident of achieving positive operating cashflow for FY18F.
We forecast FY18F net operating cashflow of S$22.4m versus negative net operating cashflow of S$7.2m in FY17 (excluding a one-off payment of a S$16.6m penalty settlement in 3Q17).

In its Mar 18 business and financial update, CSE said that it intends to keep FY18 DPS at 2.75Scts; but will commit to 2.25Scts first; and assess the additional 0.5Scts post reviewing its 1Q-2Q18F cash position and cash generation for the year.
In 1Q18, it was still in a net cash position (1Scts/share) and given guidance that billing cycles pick up in 2Q/3Q18F, this strengthens the case for a firmer cash position by end-FY18F of S$50.4m. investors.
We expect FY18F DPS of 2.75Scts to be achieved and forecast an unchanged interim DPS in 2Q18F of 1.25Scts.

We favour CSE given FY18F earnings recovering (higher GPMs, firmer contract execution) from FY17’s doldrums. Its net cash position accords it a safe haven should order flows be delayed. i. The stock offers a committed FY18F DPS of 2.75 Scts, which implies 6.1% yield. o.
Our target price is based on 13.5x CY19F P/E (close to its historical 5-year mean of 13.1x).

Cezzane SEE CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-17

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