CSE Global - DBS Research 2020-03-12: Slightly Disrupted Flow

CSE GLOBAL LTD (SGX:544)

CSE Global - Slightly Disrupted Flow

Oil prices plunged on OPEC+ fall out. Amidst the fear of weakening demand for oil due to the COVID-19 outbreak and an inconclusive OPEC+ meeting in early February, WTI declined c.29% from its peak of US$63/bbl to US$45/bbl on 28 February 2020. This was further aggravated by a breakdown in the most recent OPEC+ meeting late last week. Saudi Arabia has slashed its pricing of its crude exports for April, after OPEC and Russia failed to agree to a production cut. WTI fell c.30% at one point on 9 March 2020 to below US$30/bbl.
CSE Global (SGX:544) has exposure to Oil & Gas (O&G) but not much impact as c.90% is recurring revenue. CSE Global’s O&G business segment contributed to 65% of its FY2019 revenue and 58% of its EBIT. Although majority of the Group’s earnings is exposed to the oil & gas industry in the US, there should not be any large impact on our FY2020F’s projections as recurring revenue accounts for c.90% of our FY2020F forecast.
Out of the c.90% recurring revenue, Oil & Gas accounts for about 60-70%. The balance is from the Infrastructure division, including the rental of radio from its radio communication business.

CSE Global’s O&G business can be separated into two classifications:
1. “Flow” business, and
2. Large contracts.
Its flow business is mainly the provision of maintenance and services to its existing installed customer base while large contracts are new project wins.

CSE Global’s O&G business is mainly involved in the provision of maintenance and services for the process control systems used to monitor factors like temperature, pressure and quality control. And maintenance is ongoing despite the fall in oil prices. These contracts have a contract period of 1-2 years and are automatically renewed. The renewal could be months later after their fiscal year has started and when work has already commenced.

As O&G projects have high startup costs and CSE Global’s contracts are typically over 1-2 years, existing projects are often based on the assessment of the medium-to longer-term outlook on oil price. Short-term shocks to oil prices will not have an impact on its flow business.

Its large contract wins are new startup projects where CSE Global has yet to install its equipment and provide its services. As these projects have high startup costs and commitment value, volatility in oil price can have an impact on the availability of large contracts. Oil majors may cut back on their capex on the back of the low oil prices.

As of the current situation, we believe that the short-term volatility in oil price should not have a large impact on CSE Global’s O&G business based on the nature of its business (automatic renewals and high startup costs for its customers).
To provide a point of reference, in 2014-2016, when the WTI plunged from over US$100/bbl to below US$30/bbl, CSE Global’s new order intake for its O&G flow business declined 7.2% y-o-y in FY2016. However, we believe that the present situation is comparatively more optimistic for two reasons:
1. WTI prices declined more drastically then (-c.70%) as compared to now (c.50%), and
2. The average breakeven price for oil producers in the US has fallen from c.US$60/bbl to c.US$40/bbl.
Furthermore, back in 2016, flow business accounted for less than 50% of total revenue but now, it accounts for c.90%. This should provide an even bigger buffer.

Maintain assumption of no new large order wins for O&G; cut growth and EBIT margins for O&G business. We have not factored in any large order wins for the O&G segment in our current forecasts for FY2020F to FY2022F. For the O&G flow business, we are cutting our previous projection of a 10% organic growth y-o-y in its new order book to 0%.
In addition, we have also slightly reduced O&G EBIT margins from 6.1% to 5.9%. Both revisions were made to reflect a more conservative approach amidst the environment and were drawn from references in 2014-2016.

Its Infrastructure business is predominantly located in Singapore (government projects) and Australia, and its M&M business is in Australia. The COVID-19 has not escalated in these two countries and there should not be any impact on its two other business segments.

The overall impact of our revision is a 7.3% downward adjustment in earnings. We are maintaining our BUY call with a lower Target Price of S$0.65, which is pegged to 12.0x FY2020F earnings.

While we are not expecting any upside or downside surprises from its O&G business segment, its Infrastructure business could spring a surprise through large contract wins. With the COVID-19 slowing down business activities, the Singapore government has indicated that it will deploy a S$6.4bn package in its Singapore Budget 2020 to support the economy.
Within this package, S$1.0bn will be set aside over the next three years to build up the government’s cyber and data security capabilities. As such, this could translate into potentially large government project wins for CSE Global.
See CSE Global Share Price; CSE Global Target Price; CSE Global Analyst Reports; CSE Global Dividend History; CSE Global Announcements; CSE Global Latest News.

While we believe our projections are conservative and reflect the current environment, we have also conducted a scenario analysis and our bear-case scenario indicates a Target Price of S$0.60.

Lee Keng LING DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-03-12

SGX Stock Analyst Report BUY MAINTAIN BUY 0.65 DOWN 0.700