CSE Global - UOB Kay Hian 2019-02-22: 4Q18 Results Above Expectations; Management Expects An Even Better 2019

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

CSE Global - 4Q18: Results Above Expectations; Management Expects An Even Better 2019

  • CSE Global posted 2018/4Q18 core net profit of S$18.9m (+81.1% y-o-y)/S$5.1m (+2.8% y-o-y). Full-year performance came in 11.1% and 10.2% above our and consensus estimates respectively.
  • CSE Global has proposed a final dividend of 1.50 S cents/ share, bringing 2018 dividend yield to 5.9%.
  • Management anticipates a ramp-up in activities and expects a better financial performance in 2019.
  • Given the positive outlook, we re-iterate BUY and raise our PE-based target price to S$0.62.



4Q18 RESULTS


4Q18 results above expectations.

  • CSE GLOBAL LTD (SGX:544) reported a strong set of results with core net profit rising to S$5.1m in 4Q18 from S$5.0m a year ago, driven by improvement in gross margins which rose 5.4ppt y-o-y.
  • Revenue slipped 14.2% y-o-y to S$100.1m, mainly attributable to lower completion of oil & gas projects. Gross profit climbed to S$30.2m (+4.5% y-o-y) as gross margins continue to surprise on the upside, coming in at 30.2% (4Q17: 24.8%).

Improving gross margin trend.

  • Gross margin continued to improve in 4Q18, rising 5.4ppt y-o-y. Sequentially, gross margin rose 2.7ppt from 27.5% in 3Q18. This was due to improving margin mix from the Americas region.

Mining turned in a slight operating profit in 4Q18.

  • For 4Q18, oil & gas EBIT rose to S$ 3.0m (+20.0% y-o-y) while mining EBIT turned positive to S$0.3m from a S$1.1m loss a year ago. Infrastructure EBIT declined to S$3.9m (-25.0% y-o-y) due to forex as well as unfavourable margin mix from Australia.


STOCK IMPACT


Healthier competitive environment in key markets.

  • Management cited a more accommodative environment in CSE Global’s key markets of Australia and the US where they see increased activities and also scope for healthier pricing.
  • Going forward, we expect gross margins of ~27.0% to be sustained.

Potential beneficiary of smart nation initiatives and digital defence.

  • With the government’s emphasis on the smart nation initiative and the inclusion of digital defence as part of the overall Total Defence framework, CSE Global will be a potential beneficiary for future government tenders in this space.
  • CSE Global’s association as a Singapore company with a history of being part of Chartered Electronics Industries, the electronics arm of Singapore Technologies, makes it a suitable candidate for projects in this space. We think the recently-announced government contract wins involving telecommunications and security systems support this thesis and may further bolster CSE Global’s credentials for future project tenders.

Organic and inorganic growth strategy.

  • While CSE Global continues to see a lull in large greenfield oil & gas project wins, it is still focused on building up order wins of small greenfield projects and brownfield projects.
  • CSE Global is also actively exploring opportunities to build its footprint in Americas and Australia through acquisitions and new setup.

Serba Dinamik update.

  • We understand that CSE Global is still undergoing due diligence by Petronas in order to achieve a qualified vendor status and is working with Serba Dinamik to explore potential collaboration beyond Petronas contracts.


EARNINGS REVISION/RISK


Upward adjustment for 2019 earnings and introduce 2021 earnings.

  • We tweak our 2019 attributable net profit to S$21.0m (+2.9%). We factor in higher gross margins of ~27.0% and total orderbook growth of 17.5%. We also introduce 2021 earnings of S$25.2m, representing a 10.0% CAGR in 2018-21.
  • Risks include weak oil prices and volatility in forex rates.


VALUATION/RECOMMENDATION

  • Re-iterate BUY and raise PE-based target price to S$0.62, pegged to peers’ average of 15x 2019F PE.
  • Going forward, we see potential price upside, especially in 2019 as the impact of the synergies between Serba and CSE Global start to flow in, which could come in the form of JVs or possible outsourcing of non-Petronas work from Serba’s.


SHARE PRICE CATALYST

  • Large greenfield infrastructure project wins.
  • Large greenfield oil & gas project wins.
  • Accretive acquisitions.





Yeo Hai Wei UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2019-02-22
SGX Stock Analyst Report BUY MAINTAIN BUY 0.62 UP 0.590



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