CSE Global - UOB Kay Hian 2020-08-07: 1H20 Within Expectations; Healthy Orderbook To Support Earnings

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

CSE Global - 1H20 Within Expectations; Healthy Orderbook To Support Earnings

  • CSE Global’s 1H20 core net profit of S$12m (+27% y-o-y) was in line, forming 49%/50% of our/consensus full-year estimates. Revenue grew 25% y-o-y in 2Q20 with growth across all segments. Order intake rose 8.5% y-o-y in 2Q20, setting up a strong order backlog of S$294m (+57% y-o-y), providing the group with a steady revenue base for 2020.
  • Outlook for infrastructure and mining remain positive while O&G could see some weakness.
  • CSE Global's dividend yield is attractive at 5.1%. See CSE Global Dividend History.
  • Maintain BUY with a lower PE-based target price of S$0.59.



WHAT’S NEW


Results in line with expectations.

  • CSE Global (SGX:544) reported net profit of S$15.1m (+47.7% y-o-y) in 1H20. Excluding forex gain of S$3.0m, core PATMI of S$12.0m (+27.4% y-o-y) was in line with expectations, forming 49%/50% of our/consensus full-year estimates.

Revenue growth across all segments.

  • Earnings growth was driven by strong revenue growth of 25% y-o-y and 39% y-o-y in 2Q20 and 1H20 respectively. Oil and gas revenue rose by 30.5% y-o-y to S$83.4m in 2Q20 on the back of higher time and material revenue, recognition of greenfield project revenues and inclusion of revenue from Volta.
  • CSE Global's revenue from infrastructure remained healthy at S$25.3m (+4.1% y-o-y) while mining revenue clocked in a growth of 36% y-o-y to S$15.1m in 2Q20.

Improvement in gross margin, but offset by higher operating costs.

  • Management attributed the 2.7ppt increase in gross margin for 1H20 mainly to an improvement in sales mix. This would likely normalised going in 2H20. On the operating cost front, administrative expense outpaced the growth of revenue at 63% y-o-y in 1H20, forming 22.5% of revenue vs 19.8% in 1H19, largely due to unabsorbed labour cost from lower labour utilisation.
  • We understand the group is looking to better optimise its cost structure in 2H20.

Order intake in 2Q20 held up well.

  • Notwithstanding the challenges of COVID 19, CSE Global secured S$115m (+8.5% y-o-y) worth of new orders in 2Q20, forming 59% of our order intake forecast for 2020F. The new orders were supported mainly by S$38m (+20% y-o-y, +50% q-o-q) from infrastructure and S$22.8m from mining (+65% y-o-y, +64% q-o-q), driven by higher flow orders and the acquisition of RCS Telecommunications last year.
  • Meanwhile, new orders from the O&G gas segment fell 10.6% y-o-y to S$53m and sequentially it was down 39% q-o-q, reflecting the drop in order intake from Americas region due to COVID-19. Factoring in the higher order intake in 2Q20, the group ended the quarter with a healthy order backlog of S$293.8m (+56.6% y-o-y).


STOCK IMPACT


Strong order backlog should support earnings growth in 2020.

  • Despite the fall O&G prices, CSE Global's management shared that there has been no material project cancellation or delays for orders secured. The group has a strong order backlog of S$294m as at end-June 20, 57% higher compared to last year. We estimate that 40-50% of the order backlog as of 1H20 is likely to be recognised this year, thus providing the group with a strong revenue base for 2020 and should sufficiently meet our expectations.
  • Outlook for infrastructure and mining remain positive and should continue the positive momentum going into 2H20. Meanwhile the O&G segment could experience softness in the form of fewer opportunities and lower prices for new orders.
  • Overall, the group is confident of achieving a financial performance for 2020F similar to that of 2019.

Attractive dividend yield of 5.1%.

  • CSE Global announced an interim dividend of 1.25 S cents/share, unchanged from 2Q19. We expect the group to maintain its full year dividend at 2.75 S cents/share for 2020, translating into a generous dividend yield of 5.1%. We believe this is sustainable, given CSE Global’s strong operating cash flow and low net gearing.


EARNINGS REVISION/RISK

  • We maintain our estimates for 2020 on the back of strong order backlog and unchanged order intake of S$407m. We do however conservatively lower our 2021-22 earnings forecasts by 9.3-10.1% due to potential weakness in the O&G segment from the impact of low oil prices.
  • We factor in a lower orderbook of S$460m-517m for 2021-22 from S$483m- 523m previously. At the same time, we lower our operating margin as we cut our gross margin assumptions by 0.2-0.3ppt and factor in a slightly higher operating expense as a percentage of revenue.


VALUATION/RECOMMENDATION



SHARE PRICE CATALYST

  • Large greenfield O&G & infrastructure project wins.
  • Recovery in oil prices.
  • Accretive acquisitions.





Joohijit Kaur UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-08-07
SGX Stock Analyst Report BUY MAINTAIN BUY 0.59 DOWN 0.650



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