CSE Global - DBS Research 2021-05-21: One-off Weakness In 1Q21; Optimistic On Recovery

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CSE Global - One-off Weakness In 1q21; Optimistic On Recovery

  • CSE Global's 1Q21 overall revenue declined 14.0% y-o-y as energy segment revenue (down 27.7% y-o-y) was impacted by one-off cold weather conditions in the US.
  • Infrastructure segment revenue though grew 21.1% y-o-y on the back of higher spending by governments.
  • Energy segment should benefit from higher oil prices.

CSE Global's 1Q21 revenue declined 14.0% y-o-y to S$111.2m mainly due to weakness in its Energy segment.

  • CSE Global (SGX:544)'s Energy segment (previously referred to as the Oil & Gas segment) was affected by the poor weather conditions in the US. There was a pickup in activity in its other two segments.
    • Energy: S$69.1m (-27.7% y-o-y). Slower activities in time and materials revenue in the US due to poor weather conditions. The impact on its operations lasted for about three weeks.
    • Infrastructure: S$30.2m (+21.1% y-o-y). Mainly driven by higher spending on transport infrastructure and electrical protection for utilities, particularly in Australia, Singapore, and the UK.
    • Mining & Minerals: S$11.9m (+4.7% y-o-y). Improved demand for commodities.
  • CSE Global's 1Q21 EBITDA declined 22.3% y-o-y to S$10.0m. 1Q21 EBITDA margin declined 0.8ppt y-o-y to 9.0% mainly due to lower labour utilisation from the poor weather conditions in the US. There was also reduced productivity in some of its infrastructure projects due to delays and safe distancing measures caused by COVID-19.
  • CSE Global's 1Q21 new order intake declined 16.5% y-o-y to S$106.2m but is a sequential improvement (+7.9% q-o-q). The lower new order intake y-o-y was mainly due to a slower start and severe winter weather in the US, which affected its Energy business there. Its Infrastructure segment recorded higher new orders y-o-y due to a stronger pipeline of infrastructure projects across key operating geographies (Australia, Singapore, the UK, and the US).

Our Thoughts

1Q21 results were below our expectations, but the weakness was a one-off.

  • New order intake, revenue, and EBITDA margins fell below our expectations mainly due to the unexpected severe winter weather that affected CSE Global’s operations in the US. We believe the weakness in 1Q21 was a one-off and are expecting an improvement and strength for the remainder of the year.
  • We think that the higher oil prices should translate into higher new order wins for its Energy segment. With the recovery in global economic activity, demand for oil has risen and oil prices have been trending higher. The WTI crude oil is currently trading at US$60-65/bbl and we believe that higher and stable oil prices would entice oil producers to increase their production. This should translate into higher new order wins and revenue for CSE Global’s Energy segment.

There is potential for large greenfield project wins.

  • We are not ruling out potential large greenfield project wins should oil prices trend and stabilise at higher levels, and if global economic conditions continue to improve. Its last large greenfield oil & gas project win was in October 2019 when oil prices were at ~US$55/bbl and when oil production in its operating regions in the US was close to its peak.

Infrastructure spending by governments boost new orders wins for CSE.

  • As certain sectors continue to be impacted by COVID-19, governments have increased their spending on infrastructure projects to lift economic activity.
  • Singapore, Australia, and the UK, which are CSE Global’s key operating regions for its Infrastructure segment, have announced massive infrastructure spending programmes.
    • Singapore has recently introduced a bill that would allow the government to borrow up to S$90bn for long-term national infrastructure projects.
    • Australia has increased its infrastructure spending by A$20.5bn (+67.9% y-o-y) to A$50.75bn in 2020-21.
    • The UK has increased its infrastructure spending for 2021 by GBP27bn (37.0% y-o-y) to GBP100bn.

Earnings and Recommendation

Trim CSE Global's FY21/22F earnings forecast by 11%/3% as we adjust for the weakness in 1Q21.

  • We reduced CSE Global's revenue forecast for FY21F by 6% due to weather disruptions in its Energy segment in 1Q21 and some operational delays in its Infrastructure projects. We also reduced FY22F revenue forecast by 5% to factor in operational delays in its Infrastructure segment.
  • CSE Global's FY21F earnings forecast was reduced by a bigger proportion as compared to revenue as we lowered EBIT margins due to the one-off lower utilisation of labour in 1Q21 and operational inefficiencies due to COVID-19. FY22F earnings is higher due to a higher contribution from the Infrastructure segment, which is more profitable.

Maintain BUY call on CSE Global with a slightly lower target price of S$0.63 (previously S$0.64).

Wei Le CHUNG DBS Group Research | Lee Keng LING DBS Research | https://www.dbsvickers.com/ 2021-05-21
SGX Stock Analyst Report BUY MAINTAIN BUY 0.63 DOWN 0.640