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

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

CSE Global - Slightly Disrupted Flow

  • Plunge in oil price to slightly impact Oil & Gas business.
  • Earnings for FY2020F/21F revised down 7%/6%.
  • Attractive dividend yield of 5.9%.
  • Maintain BUY with a lower Target Price of S$0.65.

What happened? – Oil prices plunged

  • 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.

Understanding CSE’s O&G 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.

O&G flow business contracts automatically renewed every 1-2 years.

  • 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.

CSE’s O&G flow business is resilient against short-term volatility in oil prices.

  • 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.

Oil price volatility to affect large contract wins.

  • 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.

Drawing comfort from 2014-2016 oil crash experience.

  • 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.

Small revisions to projections; maintain BUY with a lower Target Price of S$0.65

  • 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.

Infrastructure and Mining & Minerals (M&M) business unaffected.

  • 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.

Maintain BUY with a slightly lower Target Price of S$0.65.

  • 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.

Large contracts in its Infrastructure business to be the near-term catalysts.

Bear-case scenario analysis indicates 29.0% upside to current price.

  • 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