CSE Global - UOB Kay Hian 2020-06-03: 1Q20 Robust Results; Strong Orderbook Should Sustain Growth

CSE GLOBAL LTD (SGX:544)

CSE Global - 1Q20 Robust Results; Strong Orderbook Should Sustain Growth

CSE Global's 1Q20 core net profit (+23% y-o-y) was in line, forming 25% of our full-year estimate. Revenue grew 56% y-o-y with growth across all segments. Order intake soared 47% y-o-y, setting up a strong orderbook of S$303m.
Although there will be uncertainties from the COVID-19 outbreak, CSE Global’s performance should remain healthy on its opex-based business for blue-chip customers.

We cut our 2020 net profit forecast by 12%. Maintain BUY with a 10% lower PE-based target price of S$0.65.

CSE Global (SGX:544)'s net profit of S$7.1m (+23.1% y-o-y) in 1Q20 came in within expectations, forming 25.4% of our full-year estimate. Earnings growth was driven by strong revenue growth of 56% y-o-y in 1Q20. See CSE Global Announcements.
While CSE Global did not publish the revenue breakdown by industry segment, based on its order intake and backlog, our calculations show that revenue for the oil and gas (O&G) and infrastructure segments grew by approximately 69% y-o-y and 7.0% y-o-y respectively, while revenue from mining doubled y-o-y to approximately S$10m in 1Q20.
Management noted that the growth in revenue was mainly attributed to strong flow revenues and contributions from recent acquisitions.

Although the COVID-19 outbreak is expected to impact CSE Global’s business, we believe its performance should remain healthy, as the majority of its orderbook contracts are opex based and its key customers are blue-chip names. For 1Q20, growth in new orders was seen across all industry segments (O&G: S$87.8m, infrastructure: S$24.5m, mining: S$13.9m), bolstered by newly-acquired Volta’s orderbook and higher growth in flow orders.
Factoring in the higher order intake in the quarter, CSE Global ended the quarter with a healthy order backlog of of S$302.7m (+66.9% y-o-y).

CSE Global has adopted an absolute DPS payout of 2.75 S cents/ share since 2014 and we are expecting the same level for 2020, translating into a generous dividend yield of 5.8%. See CSE Global Dividend History. We believe this is sustainable, given CSE Global’s strong operating cash flow and low net gearing at 18% as at 1Q20 (vs 25% for 4Q20).
Also, operating cash flow reported solid growth of 210% y-o-y to S$17.3m.

More than 90% of the group’s revenue comes from the flow business (brownfield or small green field projects) which are recurring in nature. Although the group has exposure to O&G (formed 65% of 2019 earnings), we do not expect a severe impact from the slump in oil prices given that the majority of revenue is recurring in nature, relying more on its customer’s opex rather than capex budget.
Additionally, following the O&G crisis in 2015-16, the group built up a radio communications business in Australia through a series of acquisitions as part of its business diversification plan and also pursued market share in the onshore O&G segment.
We also highlight that CSE Global ended 2019 with a backlog of S$307.3m, 60% higher compared to S$192.7m in 2015, putting the group in a better position.

We lower our 2020-22 net profit estimates by 4.8-11.5%, factoring in a lower order intake of S$410m-520m, down from S$450m-540m, as we expect the COVID-19 outbreak to weigh on growth in flow orders. We also trim our gross margin estimates slightly. We now expect 2020-22 net profits at S$24.4m (-11.5%), S$27.3m (-8.6%) and S$30.2m (-4.8%) respectively.
Maintain BUY on CSE Global with a lower PE-based target price of S$0.65 (previously S$0.72), pegged to 12.1x 2021F PE, +0.5SD above its 5-year forward mean PE (previously: 13.3x 2020F PE). Our target price implies a dividend yield of 4.2%.
See CSE Global Share Price; CSE Global Target Price; CSE Global Analyst Reports; CSE Global Dividend History; CSE Global Announcements; CSE Global Latest News.

Joohijit Kaur UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-06-03

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