CSE Global - CGS-CIMB Research 2019-02-21: 4Q18 Results Review ~ Margin Beat

CSE GLOBAL LTD (SGX:544) | SGinvestors.io CSE GLOBAL LTD (SGX:544)

CSE Global - 4Q18 Results Review: Margin Beat

  • CSE Global's 4Q18 core net profit of S$7.2m took FY18 net profit to S$20.6m, ahead at 108.8%/119% of our/consensus FY18 estimates (S$18.8m/S$17.9m).
  • CSE Global's 4Q18/FY18 DPS of 1.5Scts/2.75Scts was within expectations. End-Dec 18 order backlog was at S$181.0m (vs. S$175.0m at end-Dec 17).
  • We raise our FY19-20F EPS by c.7%. Maintain ADD with a higher Target Price, based on 13.5x FY19F P/E (close to 5-year mean of 13.1x).

Oil and Gas (O&G) division supports 12M operating margins

  • Despite a fall in 4Q18 revenue (-14.2% y-o-y), CSE GLOBAL LTD (SGX:544)'s 4Q18 EBIT rose to S$7.2m (+13.6% y-o-y) buoyed by the higher oil and gas (O&G) segment margins of 4.7% vs. 4Q17’s 2.9%.
  • FY18 revenue grew by 4.0% y-o-y but EBIT surged 36% y-o-y to S$26.7m (FY17: S$19.7m) as a better mix of contracts helped spur gross profit margins (GPM) to 27.9%.
  • All in, CSE Global's FY18F net profit rose to S$20.6m, a jump from FY17’s S$11.3m.

Order intake rises; FY18 order backlog up slightly

  • Order wins in 4Q18 rose to S$145.2m (vs. 3Q18: S$80.9m), driven by infrastructure contracts worth S$86.0m that included government contracts in Singapore; the contracts involve process control solutions, telecommunications systems, security systems and maintenance projects.
  • All in, order intake (S$384.1m) was comparable to FY17’s S$381.9m and took end-Dec 18 order backlog to S$181m (vs. S$175.0m at end-Dec 17).

On stable footing; looking for growth in O&G and infrastructure

  • Management is positive on FY19F outlook.
  • For O&G, it expects onshore and offshore activity levels to remain healthy and said while competition remains high, prices are stable.
  • For infrastructure, contract flow is likely to be stable, with the greenfield project won in 4Q18 to start contributing in 2H19F.
  • On better optimism, we raise our FY19-20F EPS by c.7%, mainly to reflect our higher GP margin assumption of 28%. We introduce FY21F revenue and EPS forecast, and expect growth of 1.7% and 1.6% y-o-y respectively.

Healthy balance sheet supportive of forward dividends and M&As

  • End-4Q18 net cash position rose to S$37.9m (vs. S$15.5m at end-4Q17). CSE Global upheld its 2.75Scts DPS in FY18. Given the healthier balance sheet, we believe our forward DPS forecast of 2.75Scts is intact.
  • The net cash position should also be able to support M&A opportunities, which the company is actively seeking.

Add call intact; Target Price rises

  • CSE Global remains our preferred small-cap O&G pick due to its healthy balance sheet which is a boon in a recovering O&G environment. It also boasts a dividend yield of c.6% (on DPS of 2.75 Scts).
  • We raise our target price to S$0.60, based on an unchanged 13.5x CY20F P/E (near its historical 5-year mean of 13.1x).
  • Catalysts/risks include higher/lower-than-expected order wins and GP margins.

Cezzane SEE CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-02-21
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