CSE Global - UOB Kay Hian 2018-09-11: Better Outlook Backed By A Commendable 6.3% Dividend Yield.

CSE GLOBAL LTD SGX:544

CSE Global (CSE SP) - Better Outlook Backed By A Commendable 6.3% Dividend Yield.

During our recent meeting with CSE, management expressed optimism in CSE’s business outlook. As market fundamentals continue to evolve favourably for CSE’s infrastructure and O&G businesses, we believe there is greater scope for new order wins. With an attractive dividend yield of 6.3% and ability to sustain profits, CSE is an excellent proxy to the oil price recovery.
We re-iterate BUY and raise our target price by 1.7% to S$0.59, after raising our 2019-20 forecasts by 3.0-6.4%.

CSE Global (CSE) remains upbeat about its outlook for the oil & gas (O&G) business, which is starting to see more small order wins. Compared with large orders, the smaller orders are highly recurring in nature and generate higher net margin.
As management looks to expand its presence beyond the Permian Basin and Eagle Ford through organic and inorganic initiatives, earnings growth momentum should be sustained with greater order intake velocity and growing orderbook.

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CSE is expecting buoyant demand from end customers in Australia and will look to build on its dominant position as a nationwide player in the 2-way radio communication infrastructure industry. There is also scope for CSE to expand its presence in the 2-way radio business to New Zealand when presented with the right opportunities.
On the other hand, CSE is bidding for several sizeable infrastructure projects worth around S$30m.

With an eye on winning projects within Malaysia and North America, CSE is working in partnership with Serba Dinamik Holdings (Serba) to become an approved service provider for Petronas. Meaningful developments within this space are expected to flow through within the next 12 to 18 months.

Since May 18, CSE has commenced share buybacks at an average of S$0.47/share, indicating management’s confidence in the company.
Riding on strong tailwinds and supported by favourable strategic developments, CSE remains undervalued at 11.0x 2019F PE with ~16% of its market cap in net cash despite a consistently profitable business.

While oil prices had experienced volatility, its steady rise had underpinned the nascent recovery of the oil industry. A bevy of supportive factors for oil prices to sustain at ~US$70/barrel continues to shed optimism on long-delayed Final Investment Decisions (FID) to be revived.
Geopolitical pressure surrounding Iranian production, falling production in Venezuela and volatile Libyan exports continue to weaken global supply base.
Additionally, short-term pipeline capacity constraint in the Permian Basin is threatening to cap production growth. These developments add to the urgency for greater capital expenditures to shore up ageing production bases, which should translate to greater order intake for CSE.

In the 2018-19 Budget, the Australian government has committed over A$75b towards infrastructure developments. This will provide CSE with opportunities to capture new business in the high-growth 2-way radio communications segment.
CSE is expected to grow its current ~50% market share in the niche 2-way radio communications industry as the infrastructure boost bolsters buoyant demand from end customers.

We adjust our 2019-20 forecasts to S$20.4m (+3.0%) and S$23.2m (+6.4%) respectively. We have incorporated higher order intakes from Australia’s infrastructure developments and the US O&G business.
Risks include weak oil prices and volatility in foreign currency exchange rates.

Re-iterate BUY with a PE-based target price of S$0.59, pegged to peers’ average of 2019F PE of 15.0x.
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.

Yeo Hai Wei UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2018-09-11

SGX Stock Analyst Report BUY Maintain BUY 0.580 Same 0.580