Thursday 15 November 2012

CSE Global

OCBC on 14 Nov 2012

CSE Global’s 3Q12 net profit to shareholders decreased by 15% YoY to S$10.8m due to (i) lower margin onshore greenfield work in the USA and (ii) lower software licensing fees in the weak UK market. Despite the setbacks, we feel that CSE’s turnaround story remains intact. The onshore greenfield projects are unlikely to hurt further as only a small portion remained in its order-book. Activity in the offshore segment is now gaining momentum and this should translate into more higher-margin jobs over the medium term horizon. The previously troubled CSE Transtel is doing well with improved earnings of S$1.8m in 3Q12 (2Q12: S$0.7). Its balance sheet is also stronger now than compared to a year ago. Meanwhile, we updated our model for 3Q12 results and revised our FY12F-13F earnings by about 10% downwards. As a result, our fair value estimate eased to S$0.99 (previously S$1.09). Maintain BUY

3Q below expectations
CSE Global’s 3Q12 revenue increased by 16% YoY to S$130m, but net profit to shareholders decreased by 15% YoY to S$10.8m. Gross margin declined to 31.2% during the quarter (3Q11: 36.1%), due to (i) lower margin onshore greenfield work in the USA and (ii) lower software licensing fees in the weak UK market. Management had previously guided that FY12F core performance to be on par with that of FY10, but given the weaker-than-expected 3Q results, it now anticipates FY12F core performance to be lower than that of FY10. 

What happened in the USA?
Management acknowledged that the onshore greenfield work in the USA yielded lower margins than what they had initially expected. In some cases, there were even cost overruns due to workscope changes; and it is now negotiating for the settlement of such variation orders. To be fair, CSE Global’s expertise lies more in the offshore projects. It started taking on onshore work more than a year ago, at the request of its customers and when offshore orders slowed after the Deepwater Horizon incident. Management has now decided that it would only do onshore jobs that afforded good margins. At the same time, activity in the offshore segment (which has higher margins) is now gaining momentum and this should translate into better profitability over the medium term horizon. 

Turnaround story intact
Despite the setbacks, we feel that CSE’s turnaround story remains intact. The onshore greenfield projects are unlikely to hurt further as only a small portion remained in its order-book. The previously troubled CSE Transtel is doing well with improved earnings of S$1.8m in 3Q12 (2Q12: S$0.7m). Its balance sheet is also stronger now compared to a year ago. We updated our model for 3Q12 results and revised our FY12F-13F earnings by about 10% downwards. As a result, our fair value estimate eased to S$0.99 (previously S$1.09). Maintain BUY.

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