CSE Global - CGS-CIMB Research 2019-09-02: Taking On Extra Volta(ge)

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

CSE Global - Taking On Extra Volta(ge)

  • We were not surprised by CSE GLOBAL (SGX:544)’s acquisition of Volta LLC given that it is continuously looking out for value accretive and strategic buys to grow.
  • We view this deal positively as it expands CSE’s depth in the onshore oil and gas market, and deal valuations were fair at an FY19F P/E of 4.3x.
  • Maintain ADD with a higher Target Price of S$0.68 to account for the acquisition.

Acquiring Volta LLC

  • CSE GLOBAL (SGX:544) announced that it is allocating US$25.1m (S$34.8m) to acquire Volta, LLC, a US company that develops, designs, manufactures, and services custom-engineered electrical equipment centers (EEC) that
    1. distribute, control, and monitor the flow of electrical energy, and
    2. provide protection to motors, transformers, and other electrically powered equipment.
  • According to CSE, by combining CSE’s engineering, automation and instrumentation and electrical service capabilities with Volta’s capability to design and fabricate large-scale electrical equipment centers, CSE will have a full-stream offering for the midstream energy and petrochemical industry.

Deal valuation reasonable

  • Volta generated a 1H19 net profit before tax of US$5.9m (S$8.3m). Conservatively assuming this accounted for 75% of the FY19F’s earnings and a US corporate tax of 25.7%, takes FY19F annualised net profit to c.US$5.8m, implying a reasonable FY19F P/E of 4.3x (vs. CSE’s FY19F of 10x) for the deal.
  • Even on FY18’s estimated net profit of US$3.6m (ex tax on pretax net profit of US$4.9m) the deal would have been valued at an FY18 P/E of 6.9x.Volta had a net book value US$10.5m (S$14.6m) as at 30 June 2019.

Higher debt, but net profit accretive

  • While we believe FY19F debt could increase to c.S$70m and CSE turns to net gearing, we are still positive on the acquisition as it is net profit accretive. For CSE illustrated on a profoma basis, Volta could have taken CSE’s net profit up by S$4.1m – ex transaction costs.
  • We have assumed an additional S$20m in FY19F and c.S$82m revenue per annum in FY20-21F (assuming that Volta turned in a net profit before tax margin of 13%). We have also assumed a 4% interest rate per annum on the S$34.8m borrowings, which takes finance costs up by S$1.4m per annum in FY20-21F.
  • All in, we forecast FY19F/20F/21F net profit will increase by 3.7%/ 15.1%/14.9% respectively post the acquisition.

Maintain ADD, with higher TP

  • We are positive on this acquisition as it increases CSE’s depth in the onshore oil and gas market and supplements its growth. CSE continues to be our preferred small-cap O&G pick. We raise our Target Price to S$0.68 (vs. S$0.60 previously) based on an unchanged 13.5x FY20F P/E (at its +0.5x s.d. level, due to its better footing).
  • Stronger-than-expected order wins and GPMs are potential stock catalysts.
  • Lower-than-expected order wins and GPMs are key risks to our ADD call.

Cezzane SEE CGS-CIMB Research | https://www.cgs-cimb.com 2019-09-02
SGX Stock Analyst Report ADD MAINTAIN ADD 0.68 UP 0.600