CSE Global - RHB Invest 2020-04-08: Temporary Disruption; Still BUY

CSE GLOBAL LTD (SGX:544)

CSE Global - Temporary Disruption; Still BUY

We cut FY20-22F earnings by 21%,14%, and 7%, and switch our valuation method to P/E in light of the current environment. Our Target Price is at +1SD from the last 12 months’ average forward FY20 P/E.
CSE Global (SGX:544)’s business should be impacted somewhat in 2Q20, due to the COVID-19 pandemic and the freefall in oil prices. As such, revenue recognition could decelerate on project delays and a lower order intake.

CSE Global’s FY19 revenue breakdown by geography is as such: 61.8% from the Americas, 36.5% from Asia-Pacific, 1.6% from Europe, the Middle East and Africa.
In terms of customer segment, 65.1% came from oil & gas, 25.5% from infrastructure, and 9.4% from mining and minerals. Its 1Q20F results should be relatively decent, with a minimal impact from the COVID-19 pandemic (due to the timeline of the outbreaks), and as the oil price war did not occur until early March.
Oil prices fell further, as the global pandemic severely dented the demand for oil. The WTI Crude price hit a 18- year low of c.USD20.00/bbl, before recovering slightly, after hints surfaced that Saudi Arabia and Russia were approaching a deal on the price war.
As a service provider, CSE Global handles mission-critical tasks, and approximately 90% of revenue is recurring in nature. Hence, a temporary drop in oil prices would not have impacted its workflow. Work has also started at two large oil & gas projects worth SGD103m. It was not until 12 Mar that the World Health Organization declared COVID-19 a global pandemic. Only after then did the US step up measures to curb the spread of the virus. As such, we think CSE Global’s 1Q20 results should still be relatively decent.

Despite turning from a net cash to a net debt company due to borrowings taken to acquire Volta LLC, cash flow remains healthy – as customers consist of government agencies and big oil players. We believe that its DPS guidance of SGD0.0275 is also sustainable. See CSE Global Dividend History.
CSE Global has switched to reporting numbers on a half-yearly basis.

In our view, 2Q20 will be a crucial period, depending on how the COVID-19 situation pans out. We remain cautiously optimistic in our outlook, but cut FY20-22F revenue by 15%, 10% and 5%. This is because we expect slower revenue recognition as a result of the delays in project execution due to the COVID-19 pandemic, lower capex in the oil & gas sector, and a slower flow of orders.
We also trim our FY20-22 net margin assumptions from 5.5% to 5.1%, 5.3%, and 5.4%.
See CSE Global Share Price; CSE Global Target Price; CSE Global Analyst Reports; CSE Global Dividend History; CSE Global Announcements; CSE Global Latest News.

Our forecasts are based on a short-term drop in oil prices and the assumption that the COVID-19 pandemic may likely taper down in 2H20. After that, work orders should start to ramp up and flow over to FY21.
Our outlook may worsen if the pandemic is prolonged, and oil prices remain extremely depressed.
Our Target Price of SGD0.54 implies a 10.5x FY21 P/E, which is slightly below the last 12 months’ average forward P/E.

Jarick Seet RHB Securities Research | Singapore Research RHB Invest | https://www.rhbinvest.com.sg/ 2020-04-08

SGX Stock Analyst Report BUY MAINTAIN BUY 0.54 DOWN 0.730