CSE Global - UOB Kay Hian 2020-11-13: 3Q20 slightly Below Expectations; Sustainable Dividend Yield At 6.1%

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CSE Global - 3Q20 slightly Below Expectations; Sustainable Dividend Yield At 6.1%

CSE Global’s 3Q20 net profit of S$5.1m (-11.6% y-o-y) marked a slight miss with 9M20 core earnings forming 70% of our and consensus full-year estimates. Revenue grew 5.7% y-o-y in 3Q20 but with a lower net margin of 4.3% (-0.8ppt). Current order backlog at S$267m (+15% y-o-y) provides some runway to revenue but uncertainty for O&G orders remains.
We lower our CSE Global EPS forecast for 2020-21F by 6.2-8.4%.
CSE Global's dividend yield is attractive at 6.0%. Maintain BUY with a 10% lower PE-based target price of S$0.53.

CSE Global (SGX:544) released a business update highlighting some of its key financials for 3Q20. Reported net profit of S$5.1m (-11.6% y-o-y) in 3Q20 was slightly below expectations with 9M20 core earnings (excluding forex) forming 70% of our and consensus full-year estimates. This came mainly as net margin missed our expectations.

Revenue rose 5.6% y-o-y to S$118m on the back of revenue recognition from large O&G orders secured in 4Q19; contributions from new acquisitions were partially offset by lower flow revenue. While the group did not disclose the revenue breakdown, the segmental order backlog implies higher O&G revenue at S$74.9m (4.9% y-o-y) while revenue from mining clocked in growth of 33.7% y-o-y to S$15m in 2Q20. Revenue from infrastructure was flat S$28.1m (-2.8% y-o-y).

Although EBIT grew 11.5% on the back of higher revenue and EBIT margin expansion (+0.3ppt), a lower net margin resulted in a net profit decline of 11.6% y-o-y in 3Q20. This was partly due to a non-recurring divestment gain of S$0.7m in 3Q19 and higher effective tax level in 3Q20. Excluding the divestment gain and forex in 3Q19, net margin in 3Q20 was 0.4ppt lower compared to 3Q19.
9M20 core net margin (ex forex) is approximately at 4.6%, which is below our expectations as we had expected a net profit margin of 5.1% for the full year. We understand that gross margin has remained relatively stable but unabsorbed labour cost from lower labour utilisation has caused some bottom line margin erosion.

CSE Global secured S$91m worth of new orders in 3Q20. This represents a 43% y-o-y decline, mainly due to lower O&G orders at S$48m (-59% y-o-y, -10 q-o-q) on the back of the current O&G environment and one-off adjustment of order intake in 3Q19 from consolidation of Volta’s orderbook (normalised level before consolidation: S$50m-60m each quarter).
On a more positive note, CSE Global's orderbook intake from infrastructure remained steady, rising 21% y-o-y.
Overall, the order intake tracks our expectations with 9M20 total order additions forming 82% of our full-year 2020 order intake forecast. With the strong order intake in past quarters, CSE Global ended the quarter with a decent order backlog of S$267m (+15 y-o-y, -9% q-o-q).

Despite the fall O&G prices, management shared that there has been no material project cancellation or delays for orders secured. The group has a strong order backlog of S$267m as at end-Sep 20, 15% higher compared to last year, consisting of some greenfield orders secured in 3Q19 which should provide some runway for revenue in 4Q20 and 1H20.
We think orders for infrastructure and mining should continue to be steady but management shared that uncertainty in the O&G segment persists on the back of the low oil and gas price and impact from COVID-19.

We expect CSE Global to maintain its full-year dividend at 2.75 cents/share for 2020 and 2021, translating into a generous dividend yield of 6.0%. We believe this is sustainable, given CSE Global’s strong operating cash flow and low net gearing of 17% as at end-3Q20.

We lower our estimates for 2020 by 6.2%, mainly as we adjust our net margin downwards but keep our order intake and revenue forecasts unchanged. For 2021-22, we lower our earnings forecasts by 8.4% and 8.9% respectively. This comes as we reduce our revenue forecasts by 3-5% as we factor in a lower order intake of S$440-473m, from S$483-523m previously.
While we think 3Q20 could be the bottom for O&G order intake, we conservatively lower our order intake assumption to account for the uncertainty in the sector. At the same time, we lower our net margin projection by 0.4ppt as we factor in a slightly higher operating expense as a percentage of revenue.
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Maintain BUY on CSE Global with a lower PE-based target price of S$0.53 (previously S$0.59), pegged to 12x 2021F PE, close to its 5-year forward mean PE of 11.9x. Our target price implies a dividend yield of 5.0%.

Joohijit Kaur UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-13

SGX Stock Analyst Report BUY MAINTAIN BUY 0.53 DOWN 0.590