CSE Global - UOB Kay Hian 2022-03-02: 2021 Results Below Expectations; Cautious Outlook For Energy Segment

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CSE Global - 2021 Results Below Expectations; Cautious Outlook For Energy Segment

CSE Global (SGX:544)'s 2021 earnings of S$15m (-46% y-o-y) were below expectations, forming 65% of our estimate, mainly due to weaker revenue from the Americas region, which was further impacted by unabsorbed labour cost.
CSE Global expects a steady stream of projects for the infrastructure and mining & minerals segments but remains cautious on the energy front. Weaker revenue from the segment coupled with higher operating cost could continue to weigh on earnings.

CSE Global’s 2021 earnings fell short of our expectations at 65% of our full-year estimate. Revenue fell 6.8% y-o-y, mainly due to a decline in large project revenues and lower time and material revenues in the Americas region (-17.2% y-o-y).
On the flip side, its business in the Asia Pacific region reached record levels of S$184m (+9.1% y-o-y) from higher revenue from infrastructure projects in Australia. Similarly, revenue in the EMEA region rose to S$12.2m, up from S$5.2m in 2020.
While gross margin remained stable, net margin declined by 2.4ppt to 3.2% due to higher selling & distribution cost and unabsorbed labour cost.

Order intake increased 7.1% to S$462m, led by the 24% y-o-y increase in order intake from the infrastructure segment. CSE Global also announced that it has secured two major contracts worth approximately S$78m in the Americas region. Revenue contribution will be over a period of between two to three years.
The first major contract is for the design, engineering, fabrication, installation and integration of complex electrical and mechanical systems and solutions for the data-centre market, which is slated for execution from 2Q22 to 4Q23 while the second contract which has a duration of three years will conclude at end-24.

CSE Global anticipates stable financial performance in the infrastructure and mining & minerals segments, bolstered by a steady stream of projects driven by requirements in digitalisation and enhancements in physical and cyber security. The energy segment could however pose challenges if the trend of fewer large projects in 2021 continues into 2022.
Weaker revenue coupled with higher operating cost in the segment could weigh on the group’s earnings. That said, the recent surge in oil prices presents additional opportunities as customers may increase their investments.

Despite the impact from the COVID-19 pandemic, CSE Global’s infrastructure segment saw its 2021 order intake growing 24% y-o-y. Earnings momentum from these segments should be sustained with greater order intake and growing orderbook, supported by increasing requirements for digitalisation and enhancements in physical and cyber security.

Dividend yield is attractive at 5.7%. We expect CSE Global to maintain its full-year dividend at S$0.0275/share for 2022, translating into an above-average dividend yield of 5.7% vs the FSSTI’s of around 4.0%.
We lower our 2022 and 2023 earnings forecasts by 35% and 33% respectively as we trim our order intake forecast and raise operating cost to account for lower operating margins in the oil and gas segment. We now expect earnings growth of 16% and 11% in 2022 and 2023 respectively. We also introduce 2024 earnings of S$22m.
Downgrade CSE Global to HOLD with a 25% lower PE-based target price of S$0.44, pegged to 13x 2022 P/E (+1 standard deviation above mean). Our downgrade comes as we account for a more cautious outlook on the oil and gas segment and potentially higher operating costs. Our target price for CSE Global implies a dividend yield of 6.3%.
See
Catalysts:
- Large greenfield O&G and infrastructure project wins.
- Recovery in oil prices.
- Accretive acquisitions.

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-03-02

SGX Stock Analyst Report HOLD DOWNGRADE BUY 0.440 DOWN 0.590