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

CSE Global - CGS-CIMB Research 2018-07-17: 2q18f Preview ~ Systems Still Go CSE GLOBAL LTD SGX:544

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.

Steady oil and gas (O&G) and infrastructure divisions drive revenue

  • 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.

GPM likely steady

  • 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.

A return to positive operating cashflow?

  • 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).

2Q18F interim dividend of 1.25Scts intact

  • 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.

Maintain ADD and Target Price of S$0.50

  • 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).

Catalysts and risks

  • Re-rating catalysts are higher-than-expected contract wins and better margins.
  • Downside risks are vice-versa.

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