CSE Global

OCBC on 14 May 2012

CSE Global (CSE)’s 1Q results came in broadly in line within our and the street’s expectations. 1Q12 revenue increased by 31% to S$134.7m (1Q11: S$102.6m), while net profit was flat at S$12.6m (1Q11: S$12.5m). Gross margin declined to 31.4% (1Q11: 40.9%), on (i) additional work incurred on its telecom projects, (ii) higher proportion of greenfield projects and (iii) lower license contribution from the UK healthcare sector. After three consecutive quarters of operating cash deficits, CSE reverted back to a positive operating cashflow (S$8m) in 1Q12 and lowered its net gearing to 30.4% (end Dec-11: 34.6%). With improvements seen in its cash-flow and gearing level, we upgrade our rating to BUY with unchanged fair value estimate of S$0.80.

1Q results within expectations
CSE Global (CSE)’s 1Q results came in broadly in line within our and the street’s expectations. 1Q12 revenue increased by 31% to S$134.7m (1Q11: S$102.6m), while net profit was flat at S$12.6m (1Q11: S$12.5m). Gross margin declined to 31.4% (1Q11: 40.9%; FY11: 31.6%), on (i) additional work incurred on its telecom projects, (ii) higher proportion of greenfield projects and (iii) lower license contribution from the UK healthcare sector. After three consecutive quarters of operating cash deficits, CSE reverted back to a positive operating cashflow (S$8m) in 1Q12 and lowered its net gearing to 30.4% (end Dec-11: 34.6%).

Working through legacy projects
CSE’s telecom division, which had encounter cost over-run issues in FY11, broke even during the quarter. The division also booked in S$9.0m of additional work (‘zero margin revenue’) for the legacy projects. Management expects a similar figure in 2Q12 and lower amounts in 2H12. As it works through the outstanding projects and secures new projects at better margins, its gross margins should revert towards the typical 35-37% levels.

Mixed performance and outlook
CSE is seeing strong business activity in the Americas, mainly due to strong growth in the greenfield onshore work. However, as onshore work typically commands a lower margin, the group’s gross margin was dragged down by 2.2%. Outlook for Europe and Asia remains lackluster. In Australia, its latest acquisition – Astib Group – performed well with 1Q12 operating profit of S$2.1m (1Q11: S$0.5m).

Upgrade to BUY
Although CSE’s margins have yet to recover, we are now seeing improvements in its cash-flows and gearing level. With the S$10.3m one-off gain from sale of eBworx shares, we also think there is a higher probability that the group will revert to a 4 Sct dividend for FY12. Upgrade to BUYwith unchanged fair value estimate of S$0.80.