CSE Global

Kim Eng on 27 June 2012

Background: CSE is a global provider of technological solutions for the industrial automation, telecom, environmental and healthcare markets. Industrial automation and telecom solutions are targeted at the oil & gas industry, focusing on the information, communication and networking needs of offshore platforms and onshore refineries. Environmental solutions include specialised furnace systems (eg incineration) to industrial and municipal customers. Healthcare solutions focus mainly on electronic patient care record management in the UK.

Why are we highlighting this stock? CSE’s new group CEO Mr Alan Russel Stubbs has recently purchased 54,000 shares at SGD0.805, shortly after CSE announced that it will receive SGD21.4m from the sale of one of its associate companies in Malaysia, eBworx. It will also record a one-time gain of SGD10.3m in 2Q12 from this sale. In our view, this suggests scope for CSE to use the proceeds of the sale to restore its dividend to SGD0.04/share after it was cut in half last year.

Risk profile improving after 2Q11 loss. After an excellent multi-year track record of execution and consistently strong growth, CSE’s FY11 profits fell 49%, mainly due to execution problems at two Middle East telecom projects. A provision of SGD21.7m was made in 2Q11 to account for total cost overruns on these two projects, which are due to complete in 3Q11. Since then, CSE has fully recovered, reporting a net profit of $12.6m in 1Q12, flat YoY but up 34% QoQ. So far, the provision has been sufficient to contain the cost overruns.

2012 looks set to be a record year. Average new orders received as at 1Q12 stood at SGD130m, up about 20% from a year before. Consensus expects CSE to earn SGD58m on average in 2012, above the 2010 peak of SGD52.5m. As a measure of street confidence, even the lowest 2012 estimate of SGD55m exceeds the 2010 earnings peak. Of course, 2012 will be helped by a relatively recent acquisition,

Australian telecom specialist ASTIB. Still trading at crisis valuations despite improved fundamentals. Despite the earnings recovery, CSE trades at 1.9x book value, near the low of the Great Financial Crisis in 2008 and at one standard deviation off its mean of 3.3x.