CSE Global - CGS-CIMB Research 2018-08-14: 2Q18 All Systems Go!

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CSE Global - 2Q18 All Systems Go!

CSE’s 2Q18 core net profit of S$4.3m (+65.7% y-o-y) took 1H18 core net profit to S$9.0m, accounting for 49%/50.5% of our/consensus FY18F (S$18.4m/S$17.8m).
Bottomline was buoyed by a higher GPM of 26.9% (vs. our forecasted 26.8%), mitigating the slightly lower-than-expected revenue.
Higher 2Q18 order intake of S$89.1m keeps order backlog at S$148.8m.
2Q18F interim DPS was intact at 1.25 Scts (vs. 1Q17: 1.25 Scts), but heartening was the commitment of a total DPS of 2.75 Scts in FY18F.

CSE’s 2Q18 revenue of S$92.1m (vs. 2Q17 revenue of S$85.5m) was steady on firm contract executions within the oil & gas (O&G) and infrastructure divisions; though 2Q18 revenue was marginally lower than our S$96.1m forecast.
CSE’s 1H18 revenue of S$184.3m accounted for 48.7% of our FY18F (S$378.3m).

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In 2Q18, gross margin (GPM) edged up to 26.9% (vs. 1Q18 GPM of 26.8%). CSE reiterated its guidance that its clients remain focused on cost control, but expects GPM could stay stable at 26-27% in FY18F.

CSE’s 2Q18 interim DPS of 1.25Scts was not a surprise; but we were heartened by the reaffirmed commitment of a FY18F DPS of 2.75 Scts (i.e. DPS of 1.5Scts for 2H18). Its net cash/share was 4.1Scts as at end-2Q18.
CSE also returned to a positive operating cashflow of S$24.7m in 2Q18 due to completion of milestones for some projects during the quarter.

Higher 2Q18 order win of S$89.1m was led by the O&G (S$60.5m) and infrastructure segments (S$24.2m), taking order backlog to a steady S$148m at end-2Q18 (vs. 1Q18: S$148.6m).
Management expects steady inflow of small greenfield and brownfield jobs for all segments but larger greenfield O&G contract awards may now only emerge in FY19F (guidance of 6-12 months).

We favour CSE given its recovery in FY18F earnings (higher GPM, firmer contract execution) from the bottom in FY17. Its net cash position should provide comfort if order flow is delayed. The stock offers a committed FY18F DPS of 2.75 Scts, which implies c.6% yield.
Our target price is based on 13.5x CY19F P/E (close to its historical 5-year mean of 13.1x).
In the longer term, the collaboration with Serba Dinamik could lead to downstream O&G, power and utilities contracts from the Middle East and Malaysia.

Re-rating catalysts/downside risks include higher/lower-than-expected contract wins and margins.

Cezzane SEE CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-14

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