CSE Global - DBS Research 2019-11-08: New Order Intake Picking Up

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CSE GLOBAL LTD (SGX:544)

CSE Global - New Order Intake Picking Up

• CSE GLOBAL (SGX:544)'s 3Q19 results largely in line; higher-than-expected new orders.
• New order intake increased 94.4% y-o-y, 47.4% q-o-qfrom Volta and organic growth.
• Two large oil & gas projects secured recently to contribute to FY20F/21F’s earnings.
• Revised FY20F/21F earnings forecasts by 6%/11%; maintain BUY with a higher Target Price of S$0.69.

Higher order book to drive earnings for FY20F and beyond.

• New order intake almost doubled y-o-y, more than we anticipated, on the back of an increase in oil production in Americas. Excluding newly acquired Volta’s contribution, we estimate that CSE Global’s new order book in 3Q19 grew by c.40% y-o-y and c.5% q-o-q. With its increase in oil & gas projects, and large contract win announced recently, we anticipate this to contribute positively to CSE’s earnings in FY20F and beyond.
• We project FY19F-21F earnings CAGR of 21% for CSE Global, driven by the expected increase in capex of oil majors, and riding on the smart nation initiatives in Singapore and increasing infrastructure projects in Australia.
• About 90% of CSE Global’s total revenue is generally recurring in nature. This stable stream of revenue, coupled with its high customer retention rate and strong operating cashflows, should support a consistent DPS of c.2.75 Scts p.a., or an attractive yield of c.5%. See CSE Global Dividend History.

Results largely in line; higher-than-expected new order intake

3Q19 was broadly in line.

• CSE Global's 3Q19 revenue increased 21.9% y-o-y to S$111.5m, largely driven by more projects from oil & gas, and mining & minerals which offset the lower infrastructure revenue. See CSE Global Announcements.
• A higher revenue mix of lower margins from oil & gas weighed slightly on CSE Global’s 3Q19 margins. 3Q19 net profit increased 17.8% y-o-y due to an increase in oil & gas projects, the inclusion of Volta and a divestment gain of S$0.7m.

Excluding Volta’s cost, EBIT margins would have grown.

• CSE Global’s reported lower EBIT margins of 6.3% in 3Q19, as compared with the 7.5% in 3Q18. Removing Volta’s one-off acquisition expense of S$0.9m, CSE Global’s EBIT margins would have increased to 8.0%.

Higher new order intake from Volta and organic growth.

• New order intake increased by 94.4% y-o-y, 47.4% q-o-q on the back of clinching new orders in its oil & gas business and Volta’s backlog. In 3Q19, CSE Global’s oil & gas new order intake increased by S$56.8m (94.4% increase q-o-q).
• Volta’s contribution to this increase in new order intake was c.S$45m, which includes Volta’s backlog as well as its new order intake. Volta’s new order intake is estimated to be c.S$20-30m, largely from its flow business, which is generally recurring in nature.

Higher new order book is expected in 4Q19.

• 4Q19’s new order intake is expected to be about S$200m, mainly due to the addition of the S$103.7m large contract wins in October. We expect CSE Global’s FY19F new order intake to be c.S$580m, increasing 50% y-o-y from S$384.2m in FY18.

OUTLOOK

OPEC cuts oil demand growth; will support oil prices.

• OPEC reduced its forecast for global oil demand over the medium term, with oil consumption reaching 103.9 million barrels per day (mbpd) in 2023, down from 104.5mbpd in its forecast last year. It cited efficiency gains and use of other fuels as well as reduced economic activity as key reasons for the lower-than-expected growth in demand. However, to sustain oil prices, OPEC has guided for its own production to decline over the same period.

OPEC expects US shale oil to continue to boom.

• In the last two years, crude oil production from the US increased by 33.7% to 12.4mbpd and shale oil production increased by 40.6% to 9.0mbpd. In its World Oil Outlook 2019 report released on 5 November 2019, OPEC is expecting the US to overtake OPEC’s production by 2024. We continue to be bullish on CSE Global given its exposure to the oil & gas industry in Americas.

EARNINGS RECOMMENDATION

Raise Target Price to S$0.69.

• Revised up FY20F/FY21F earnings by 6%/11% to account for the higher orderbook. We raised our Target Price to S$0.69 from S$0.65 on the back of an increase in FY20F’s earnings. See CSE Global Share Price; CSE Global Target Price.
• Two large oil and gas contracts to contribute to earnings in FY20F and beyond. On 29 October 2019, CSE Global announced two new oil & gas contract wins in Americas worth S$103.7m. These new orders involve projects ranging from the design, fabrication and construction, to the engineering and integration of offshore oil & gas process control systems.
• The projects have a longer life of c.1-2 years and are expected to contribute positively to FY20F figures and beyond. These projects have similar profitability to the company’s Americas oil & gas projects (c.6-7% EBIT margins). We believe that these projects will contribute about c.S$3m to its net profit in FY20F.

Where we differ:

• We are more optimistic on the outlook for CSE Global, on the back of higher new order wins driven by continued increase oil production in the US.

Lee Keng LING DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2019-11-08

SGX Stock Analyst Report BUY MAINTAIN BUY 0.69 UP 0.650