CSE Global

OCBC on 13 Aug 2015

CSE Global Limited’s (CSE) 2Q15 core PATMI came in flat, just up 0.4% YoY at S$8.1m, while revenue increased 3.8% to S$112.1m, driven by growth from the Americas and Europe/Middle East/Africa regions. However, 2Q15 gross margin declined 2.6ppt YoY to 26.6% with higher revenue recognized from a large but lower gross margin greenfield project in Australia. While 1H15 revenue rose 8.2% YoY to S$217.7m, higher operating expenses and lower gross margin led to a flat 0.6% growth in core PATMI to S$15.7m. We expect 2H15 to catch up on higher gross margin, steady stream in new orders received and recognition of close to half of its existing outstanding order book. Recurring brownfield projects will continue to contribute significantly to its earnings resilience. On these reasons and rolling-forward to 9x blended FY15/16F PER, our FV remains unchanged at S$0.62. However, given the recent price correction, we upgrade CSE to BUY, supported by a decent FY15F dividend yield of 5.4%.

Lower margin project largely recognized by 1H15
CSE Global Limited’s (CSE) 2Q15 core PATMI came in flat, just up 0.4% YoY at S$8.1m, while revenue increased 3.8% to S$112.1m, driven by growth of 9.8% and 15.5% from the Americas and Europe/Middle East/Africa (EMEA) regions, respectively. However, 2Q15 gross margin declined 2.6ppt YoY to 26.6% with higher revenue recognized from a large but lower gross margin greenfield project in Australia, translating to a 15.4% YoY decline in EBIT to S$11.4m. CSE’s 1H15 revenue rose 8.2% YoY to S$217.7m, driven by the Americas and EMEA regions but higher operating expenses and lower gross margin led to a flat 0.6% growth in core PATMI to S$15.7m, which formed only 43.9% of our FY15 forecast. However, excluding the lower margin Australia project, gross margin would have been closer to 30%, which is encouraging.

Expects 2H15 to catch up on healthy order book
Despite the headwinds in the oil & gas (O&G) industry, CSE continued to show resilience in its sales as 2Q15 new orders received rose 2.2% YoY to S$97.4m while outstanding orders as at end-2Q15 grew 22.1% to S$237.8m. While 1H15 core PATMI fell short of our FY15 forecast, we expect 2H15 performance to catch up on two key reasons: 1) with lower revenue recognition from the lower margin Australia project, we believe overall blended gross margin is likely to return to the 28% region, and 2) we expect close to half of its outstanding order book to be recognized in 2H15, and the remaining by FY16. We remain cautiously optimistic over CSE’s outlook, as we note: 1) opportunities are available for recurring brownfield and smaller greenfield projects, 2) CSE acquired new customers in the O&G industry over 1H15, and 3) the group is expanding its presence in providing infrastructure services (specifically telecommunication) in Australia to maintain revenue contribution from the country as the large greenfield project nears completion.

Share price correction overdone; upgrade to BUY
Incorporating 2Q15 results, we slightly pare our FY15/16F core PATMI by 1.9/2.1%. Rolling forward to 9x blended FY15/16F PER, our FV remains unchanged at S$0.62. Noting a 16.9% correction in share price since our last update, we upgrade CSE to BUY, supported by a solid balance sheet and decent FY15F dividend yield of 5.4%.

CSE Global Limited

OCBC on 19 June 2015

CSE Global Limited (CSE) recently disposed its 66% stake in Power Diesel (PD), for ~S$15.5m. We estimate that PD contributes annual revenue of about S$18-20m and annual PATMI of ~S$2m. Going forward, these contributions will cease following the completion of the disposal on 12 Jun. As at 31 Mar, the book value of PD is ~S$8.8m, while the net consideration from the sale after deducting all transaction costs and fee is ~S$11.0m. This results in a net gain of ~S$2.2m and will be recorded in 2Q15. Even without contributions from PD going forward, we do not expect any change in CSE’s earnings outlook for FY15 and FY16. In fact, post disposal, we think the increase in cash holdings gives CSE even greater financial ability to acquire companies to further grow its business. As we were conservatively forecasting for flat FY15 PATMI and a modest 5% growth for FY16, we opt to keep our forecasts unchanged. Supported by a decent FY15 dividend yield of 4.4%, maintain HOLD with the same FV estimate of S$0.62.

Net gain of ~S$2.2m arising from disposal of subsidiary
CSE Global Limited (CSE) recently disposed its 66% shareholding in a subsidiary, Power Diesel (PD), for ~S$15.5m. PD is mainly involved in the business of inspection, maintenance, repair and overhaul of diesel and marine engines/equipment on onboard vessels while CSE’s key focus is on system integration works on offshore platforms. We estimate that PD contributes annual revenue of about S$18-20m and annual PATMI of ~S$2m. Going forward, these contributions will cease following the completion of the disposal on 12 Jun. As at 31 Mar, the book value of PD is ~S$8.8m, while the net consideration from the sale after deducting all transaction costs and fee is ~S$11.0m. This results in a net gain of ~S$2.2m and will be recorded in 2Q15. However, note that the net gain at completion date (12 Jun) would be lower as CSE continues to account for profits from PD for the period up to the completion date.

No change in earnings outlook; stronger balance sheet
Even without contributions from PD going forward, we do not expect any change in CSE’s earnings outlook for FY15 and FY16. Management’s previous guidance of flat to 5% growth in FY15 PATMI remains unchanged. We believe management’s strategy is to look for and secure smaller projects amidst capital expenditure reduction of big projects by the big players is likely to help cushion the impact during this difficult period in the oil & gas (O&G) industry. A check with management also gives us the confidence that CSE is on track in terms of meeting its guidance. In fact, post disposal, we think the increase in cash holdings gives CSE even greater financial ability to acquire companies to further grow its business.

Keep forecasts unchanged; maintain HOLD
While we view this disposal positively as it results in deeper pockets for M&A activities, we prefer to remain cautious given the uncertain outlook of the O&G industry. As we were conservatively forecasting for flat FY15 PATMI and a modest 5% growth for FY16, we opt to keep our forecasts unchanged. Supported by a decent FY15 dividend yield of 4.4%, maintain HOLD with the same FV estimate of S$0.62.

CSE Global Limited

OCBC on 19 June 2015

CSE Global Limited (CSE) recently disposed its 66% stake in Power Diesel (PD), for ~S$15.5m. We estimate that PD contributes annual revenue of about S$18-20m and annual PATMI of ~S$2m. Going forward, these contributions will cease following the completion of the disposal on 12 Jun. As at 31 Mar, the book value of PD is ~S$8.8m, while the net consideration from the sale after deducting all transaction costs and fee is ~S$11.0m. This results in a net gain of ~S$2.2m and will be recorded in 2Q15. Even without contributions from PD going forward, we do not expect any change in CSE’s earnings outlook for FY15 and FY16. In fact, post disposal, we think the increase in cash holdings gives CSE even greater financial ability to acquire companies to further grow its business. As we were conservatively forecasting for flat FY15 PATMI and a modest 5% growth for FY16, we opt to keep our forecasts unchanged. Supported by a decent FY15 dividend yield of 4.4%, maintain HOLD with the same FV estimate of S$0.62.

Net gain of ~S$2.2m arising from disposal of subsidiary
CSE Global Limited (CSE) recently disposed its 66% shareholding in a subsidiary, Power Diesel (PD), for ~S$15.5m. PD is mainly involved in the business of inspection, maintenance, repair and overhaul of diesel and marine engines/equipment on onboard vessels while CSE’s key focus is on system integration works on offshore platforms. We estimate that PD contributes annual revenue of about S$18-20m and annual PATMI of ~S$2m. Going forward, these contributions will cease following the completion of the disposal on 12 Jun. As at 31 Mar, the book value of PD is ~S$8.8m, while the net consideration from the sale after deducting all transaction costs and fee is ~S$11.0m. This results in a net gain of ~S$2.2m and will be recorded in 2Q15. However, note that the net gain at completion date (12 Jun) would be lower as CSE continues to account for profits from PD for the period up to the completion date.

No change in earnings outlook; stronger balance sheet
Even without contributions from PD going forward, we do not expect any change in CSE’s earnings outlook for FY15 and FY16. Management’s previous guidance of flat to 5% growth in FY15 PATMI remains unchanged. We believe management’s strategy is to look for and secure smaller projects amidst capital expenditure reduction of big projects by the big players is likely to help cushion the impact during this difficult period in the oil & gas (O&G) industry. A check with management also gives us the confidence that CSE is on track in terms of meeting its guidance. In fact, post disposal, we think the increase in cash holdings gives CSE even greater financial ability to acquire companies to further grow its business.

Keep forecasts unchanged; maintain HOLD
While we view this disposal positively as it results in deeper pockets for M&A activities, we prefer to remain cautious given the uncertain outlook of the O&G industry. As we were conservatively forecasting for flat FY15 PATMI and a modest 5% growth for FY16, we opt to keep our forecasts unchanged. Supported by a decent FY15 dividend yield of 4.4%, maintain HOLD with the same FV estimate of S$0.62.

CSE Global Limited

OCBC on 12 May 2015

CSE Global Limited’s (CSE) 1Q15 PATMI came in flat, just up 0.9% YoY at S$7.6m, while operating profit grew 20.7% to S$11.1m on the back of a 13.2% growth in revenue to S$105.5m. Higher operating expenses as well as higher tax expenses resulted in flat PATMI growth. Even though 1Q15 PATMI only formed 21.4% of our FY15 forecast, we think it is within our expectations on stronger quarters for the rest of FY15 based on its healthy outstanding order book. CSE’s 1Q15 new orders jumped 40.4% YoY to S$103.1m while outstanding order book as at end-1Q15 remains healthy as it grew 21.8% YoY to S$252.5m. We believe CSE should continue to see resilient earnings, especially since it derives more than 50% of its revenue from the recurring brownfield jobs. As we incorporate 1Q15 results, and update with slightly higher tax assumption, our forecast remains largely unchanged. Hence, maintain HOLD with an unchanged FV of S$0.62, supported by a decent FY15 dividend yield of 4.8%.

1Q15 PATMI came in flat at S$7.6m
CSE Global Limited’s (CSE) 1Q15 PATMI came in flat, just up 0.9% YoY at S$7.6m, while operating profit grew 20.7% to S$11.1m on the back of a 13.2% growth in revenue to S$105.5m. 1Q15 revenue was mainly driven by growth of 28.2% and 22.5% from the Americas and Europe/Middle East/Africa (EMEA) regions, respectively, but offset by a 5.4% decline from the Asia-Pacific region. Due to more brownfield projects, 1Q15 gross margin improved 1.0ppt YoY to 28.5%. However, higher operating expenses as well as higher tax expenses attributable to the write-back of deferred tax and non-recurring tax deductions recorded in 1Q14 resulted in the flat PATMI showing. Even though 1Q15 PATMI only formed 21.4% of our FY15 forecast, we think it is within our expectations as we expect stronger quarters for the rest of FY15 based on its healthy outstanding order book.

Earnings to remain resilient with healthy order book
CSE’s 1Q15 new orders jumped 40.4% YoY to S$103.1m despite headwinds face in Oil & Gas (O&G) industry. Outstanding order book as at end-1Q15 remains healthy as it grew 21.8% YoY to S$252.5m. Management noted optimism over opportunities available for brownfield and smaller greenfield (less than S$5.0m) projects, specifically in the O&G industry. Management also reiterated its strategy is to continue revenue growth without compromising gross margins. Also, IDC recently in Mar-15 highlighted that reductions in IT budgets among O&G companies were lower than expected, which is in-line with CSE’s optimism. Despite uncertain outlook over oil prices, we believe CSE should continue to see resilient earnings, especially since it derives more than 50% of its revenue from the recurring brownfield jobs.

FV unchanged; maintain HOLD
As we incorporate 1Q15 results, and update with slightly higher tax assumption, our forecast remains largely unchanged. While CSE is optimistic on its outlook, we prefer to be cautious and keep our FY16 forecast flat. Supported by a decent FY15 dividend yield of 4.8%, maintain HOLD with an unchanged FV of S$0.62.

CSE Global Limited

OCBC on 2 Mar 2015

CSE Global Limited’s (CSE) FY14 results came in within our expectations. FY14 core PATMI jumped 16.4% YoY to S$35.4m on the back of a 4.3% increase in revenue to S$433.8m. Revenue growth was mainly driven by Asia-Pacific and the Americas regions, but partially offset by weakness in Europe/Middle East/Africa market. Better operating margins and large decline in finance expenses contributed to the improvement in FY14 core PATMI. New orders received for FY14 grew 27.3% to S$461.6m, while outstanding orders at the end of the FY14 stood at S$255.0m (end FY13: S$227.2m). We expect increased competition for greenfield projects while brownfield jobs to keep earnings resilient as they are recurring from existing customers. With the updated growth guidance for FY15, stronger-than-expected ending order book and expectation of slight erosion in margins (i.e. <2%), we raise our FY15 revenue forecast by 2.1% but cut our PATMI projection by 8.9%. Consequently, our FV drops from S$0.68 to S$0.62 (based on 9x FY15F P/E). Supported by a decent FY15 dividend yield of 4.6%, maintain HOLD.

FY14 results met our expectations
CSE Global Limited’s (CSE) FY14 results came in within our expectations. For 4Q14, CSE reported a 59.3% YoY jump in core PATMI to S$10.4m despite a 6.8% decline in revenue to S$120.3m. And for FY14, core PATMI jumped 16.4% to S$35.4m on the back of a 4.3% increase in revenue to S$433.8m. Its FY14 revenue and core PATMI formed 104.1% and 103.1% of our forecasts, respectively. Full-year revenue growth was mainly driven by Asia-Pacific and the Americas regions, but partially offset by weakness in Europe/Middle East/Africa market. Better operating margins and large decline in finance expenses contributed to the improvement in FY14 core PATMI. New orders received for FY14 grew 27.3% to S$461.6m, while outstanding orders at the end of the FY14 stood at S$255.0m (end FY13: S$227.2m). The main reason for the jump in new orders received is due to renewal of the multi-year contract for maintenance of the ERP system in Singapore.

Expects earnings to remain resilient
Although we believe CSE will see increased competition for greenfield projects in FY15 as the plunge in oil prices had resulted in the reduction of capex announced recently by oil and gas (O&G) majors, we think earnings will remain resilient as a result of high exposure to recurring maintenance jobs. We forecast these brownfield jobs to contribute ~S$60.0m per quarter. Evident in its strong outstanding orders, CSE managed to secure a greenfield project in the Gulf of Mexico worth ~S$20m in 4Q14, which is expected to be recognized in FY16. As a result of the uncertainties in O&G industry, management cut its growth target for its core PAT from 10-15% to flat or no growth in FY15. Management also stated they are confident of retaining existing customers and will focus CSE’s resources on doing so.

Introduce FY16 forecasts; maintain HOLD
With the updated growth guidance, stronger-than-expected ending order book and slight erosion in margins (i.e. <2%), we raise our FY15 revenue forecast by 2.1% but cut our PATMI projection by 8.9%. We forecast FY15 and FY16 core PATMI to grow 0.6% and 5.4%, respectively. Consequently, our FV drops from S$0.68 to S$0.62 (based on 9x FY15F P/E). Supported by a decent FY15 dividend yield of 4.7%, maintain HOLD.

CSE Global

OCBC on 13 Nov 2014

CSE Global Limited’s (CSE) 3Q14 results were in-line with our expectations. Revenue grew 15.2% YoY to S$112.3m, while core PATMI from continuing operations jumped 39.6% YoY to S$9.4m due to better operating margins from good cost control and a big decline in finance expenses. Despite headwinds in the oil and gas sector, CSE still managed to boost its new order wins for 3Q14 by 29.1% YoY to S$119.3m. Looking ahead, CSE reiterated its target of growing its core PAT by 10-15% organically in FY14. We keep our PATMI projections largely unchanged, but raise our fair value estimate from S$0.64 to S$0.68 as we roll forward our valuations to 9x FY15F EPS. We like CSE for its attractive FY14F dividend yield of 4.0% and forecasted ROE of 17%, but believe current valuations are fair, with the stock trading at FY14F and FY15F PER of 10.5x and 9.2x, respectively. Maintain HOLD.

3Q14 results within expectations
CSE Global Limited’s (CSE) 3Q14 results were in-line with our expectations. Revenue grew 15.2% YoY to S$112.3m on higher sales achieved in Asia Pacific and the Americas regions, but partially offset by weakness in its Europe/Middle East/Africa market. Correspondingly, CSE’s core PATMI from continuing operations jumped 39.6% YoY to S$9.4m. This was attributed to topline growth, better operating margins from good cost control and a big decline in finance expenses. CSE’s 9M14 revenue grew 9.2% YoY to S$313.6m while core PATMI from continuing operations increased 4.7% to S$25.0m. This formed 77.2% and 72.8% of our FY14 projections, respectively. 

Strong order wins
Despite headwinds in the oil and gas sector emanating from a plunge in oil prices and reduction in capex by oil majors, CSE still managed to boost its new order wins for 3Q14 by 29.1% YoY to S$119.3m, such that 9M14 contracts secured rose 6.3% to S$288.1m. The bulk of the orders won came from projects in the Gulf of Mexico. Its outstanding order book stood at S$201.7m as at 30 Sep 2014 (end 2Q14: S$194.7m). Another positive highlight of 3Q14 came from the positive S$8.8m of operating cashflow generated, an improvement from the S$10.0m of cash consumed from operating activities in 1H14. Looking ahead, CSE reiterated its target of growing its core PAT by 10-15% organically in FY14.

Roll forward valuations and maintain HOLD
CSE’s business model entails focusing on maintenance projects which provide the group with a more resilient recurring income stream. While we raise our FY14 and FY15 revenue forecasts by 2.6% and 1.8%, respectively, our PATMI projections are kept largely unchanged, as we also assume higher tax expenses given its increasing exposure to higher tax regions like the U.S. Rolling forward our valuations to 9x FY15F EPS, we derive a higher fair value estimate of S$0.68 (previously S$0.64). Although we like CSE for its attractive FY14F dividend yield of 4.0% and forecasted ROE of 17%, we believe current valuations are fair, with the stock trading at FY14F and FY15F PER of 10.5x and 9.2x, respectively. Maintain HOLD.

CSE Global Limited

OCBC 13 Aug 2014

CSE Global Limited reported a 6.0% YoY decline in its PATMI from continuing operations to S$8.0m despite a 16.3% jump in revenue to S$108.1m. The former fell short of our expectations, largely due to a higher-than-expected effective tax rate. An interim DPS of 1.25 S cents was declared (2Q13: 1.5 S cents). CSE also registered a downtrend in its order backlog, but management maintained optimistic on its prospects. It reiterated its target of growing its core PATMI by 10-15% organically in FY14. We lower our FY14 and FY15 core PATMI forecasts by 4.9% and 1.0%, respectively. As CSE’s share price has performed well since our last update, we believe its share price has now run ahead of its fundamentals. Hence, we downgrade CSE to HOLD, with a revised fair value estimate of S$0.64 (previously S$0.63), as we roll forward our valuations to 9x blended FY14/15F core EPS

2Q14 core earnings below expectations
CSE Global Limited reported a 6.0% YoY decline in its PATMI from continuing operations to S$8.0m despite a 16.3% jump in revenue to S$108.1m. The former fell short of our expectations, largely due to a higher-than-expected effective tax rate (PBT grew 11.9% YoY to S$12.0m). Management attributed this to a one-off deferred tax expense recognised in the U.S. and stronger contribution from higher tax jurisdictions like the U.S. and Australia. For 1H14, revenue grew 6.2% to S$201.3m, while PATMI from continuing operations fell 9.1% to S$15.6m. This constituted 50.0% and 43.2% of our FY14 forecasts, respectively. An interim DPS of 1.25 S cents was declared (ex-dividend on 15 Aug 2014 and payable on 27 Aug). This was a slight decline from the 1.5 S cents declared in 2Q13. 

Order book on downtrend
CSE also registered a 9.3% YoY decrease in its new orders received to S$95.4m, while outstanding orders were S$194.7m (-28.6% YoY), as at end 2Q14. Sequentially, while new orders secured rose 29.9%, its order backlog slipped 6.1%. Nevertheless, we note that CSE has a steady stream of brownfield projects which are not typically captured in its quarterly order book figure, given the fast turnaround time between securing the orders and work completion. Management maintained optimistic on its prospects, and reiterated its target of growing its core PAT by 10-15% organically in FY14.

Downgrade to HOLD
Although we expect 2H14 to be stronger sequentially for CSE, we see the need to lower our FY14 and FY15 core PATMI forecasts by 4.9% and 1.0%, respectively. CSE’s share price has performed strongly since we last reiterated our ‘Buy’ recommendation on 14 May this year, appreciating 16.9% as compared to the STI’s 2.5% gain during the same period. While we like CSE for its healthy balance sheet and FY14F dividend yield of 4.0%, we believe its share price has now run ahead of its fundamentals. Hence, we downgrade CSE to HOLD, with a revised fair value estimate of S$0.64 (previously S$0.63), as we roll forward our valuations to 9x blended FY14/15F core EPS.

CSE GLOBAL

UOBKayhian on 25 Jul 2014

Lean And Mean Undervalued Machine
CSE Global (CSE) is an international technology group with clients from the oil & gas
(O&G), mining and infrastructure sectors. CSE provides engineering solutions
throughout the entire O&G supply chain - upstream (automation systems), midstream
(pipeline monitoring) and downstream (telecommunications). It also has a unit that
provides environmental furnace systems.
INVESTMENT HIGHLIGHTS

• Initiate with BUY and a street-high target price of S$0.88, representing a 23% upside. Our target price is based on 12.6x 2015F PE (EPS: 7 cents), or a 20% discount to sector mean. CSE offers the highest dividend yields of 3.6-4.2% in the sector, based on a 40% payout. We project a conservative 3-year net profit CAGR of 8.3% on the back of: a) rising orderbook driven by maintenance projects and a refocus on brownfield and small greenfield projects, and b) improving margins. We see room for more upside from a turnaround in its environmental division and earnings-accretive M&As.
• Constant-flow business accounts for 80% of group revenue. These include maintenance, upgrading and brownfield projects that consistently flow in based on the requirements of the current O&G market and from existing customers. These provide a base level of business that the group has to sustain and also provides stability in an otherwise volatile and long-drawn O&G market.
• S$300m orderbook provides visibility from 2014 onwards. With maintenance & enhancement revenue estimated at S$150m-200m p.a., we think revenue for this year will meet last year’s over S$400m. With more higher-margin projects and lower financing costs, we project a net profit growth of 8.5% yoy in 2014. Management is now looking to secure contracts for 2015 recognition.
• Leaner and refocused after divestment of healthcare unit; decamping in the Middle East. We view the sale of its UK subsidiary, Servelec Group, in 2013 positively as the division was rather isolated from the rest of the group and had limited growth potential. Decamping from three loss-making projects in the Middle East in 1H14 also removes the overhang of further provisions. We believe management is now focused on consolidating its position and running a more efficient strategy.
• Carving a niche in engineering integration solutions for O&G. With a smaller and nimbler business model, CSE has refocused on small greenfield and brownfield projects where it can compete more effectively. Gross margins are higher at 30-35%, and execution horizons are shorter at 3-6 months. Its relatively small size allows it flexibility and faster turnarounds when bidding for projects.
• Clean balance sheet supports strategic M&As. We do not rule out small M&As for regional strengthening while more sizeable transactions may come in 2H15. Management targets companies that are earnings-accretive with strong cash flows. As of end-Mar 14, the group had a gearing of 10% and net cash of S$44m (or 8.6 cents/ share).

CSE Global Limited

OCBC on 14 May 2014

CSE Global Limited made a slow start to FY14 as expected, reporting a 3.5% YoY fall in its 1Q14 revenue to S$93.2m and a 12.1% decline in its PATMI from continuing operations to S$7.5m. This formed 23.1% and 20.9% of our full-year forecasts, respectively. We are expecting a stronger 2H for CSE. Management has echoed this, and has set a target of organically growing its core PATMI by 10-15% in FY14, which we believe is slightly conservative. We retain our forecasts and S$0.63 fair value estimate (pegged to 9x FY14F EPS) on CSE. Reiterate BUY, supported by a prospective FY14F dividend yield of 5.1%.

1Q14 results within expectations
CSE Global Limited made a slow start to FY14 as expected, reporting a 3.5% YoY fall in its 1Q14 revenue to S$93.2m and a 12.1% decline in its PATMI from continuing operations to S$7.5m. This formed 23.1% and 20.9% of our full-year forecasts, respectively. We are expecting a stronger 2H for CSE. The group experienced some startup project delays in the Americas, which resulted in an 8.0% YoY decline in revenue from this region. This was due to harsh winter conditions in the U.S., but the situation has since picked up from Mar. Management is confident that it will be able to do better for this region in FY14 as compared to last year, thanks to the still buoyant oil and gas sector. The main drag in 1Q14 came from its EMEA operations, which recorded a net loss of S$188k (1Q13: net profit of S$768k) due to a sharp 56.0% dip in revenue. Management updated us that there was no cost overrun in the Middle-East in 1Q14, and the decline in revenue was attributed to a lack of quality projects it could undertake. Hence, it plans to right-size its operations there in 2Q14.

Management still optimistic on prospects
CSE clinched S$73.4m of new orders in 1Q14, and ended the quarter with an outstanding order book of S$207.4m (versus S$227.2m as at end FY13 and S$261.5m as at 31 Mar 2013). Management remains optimistic on its outlook, and has set a target of organically growing its core PATMI by 10-15% in FY14, which we believe is slightly conservative.

Maintain BUY 
Notwithstanding CSE’s slow start to FY14, we are expecting improvement in its operational performance ahead. We had previously highlighted in our 28 Mar 2014 report that we expect FY14 to be a backend-loaded year for CSE, given the timing of certain key projects and expectations of new order wins in 2H14. We retain our forecasts and S$0.63 fair value estimate (pegged to 9x FY14F EPS). Reiterate BUY, supported by a prospective FY14F dividend yield of 5.1%.

CSE Global

OCBC on 28 Mar 2014

Following the successful divestment of CSE Global’s entire stake in Servelec Group in Dec last year, we believe management will focus on driving its growth largely from the oil and gas sector. CSE has significant exposure to the Gulf of Mexico (both the U.S. and Mexico side), and we expect it to benefit from positive trends arising from this area. Looking ahead, we also do not expect CSE to make any further provisions for cost overruns for its Middle-Eastern project, which would aid its margins recovery. We re-work our assumptions following a change in analyst coverage, and now forecast CSE to register core PATMI growth of 18.7% and 9.3% in FY14 and FY15, respectively. Applying a 9x target PER peg to our FY14 EPS forecast, we derive a fair value estimate of S$0.63 (previously S$0.96 before the Servelec Group divestment). Maintain BUY.

Focusing largely on the oil and gas sector
Following the successful divestment of CSE Global’s entire shareholding interest in Servelec Group in Dec last year, we believe management will focus on driving its growth largely from the oil and gas sector. This sector contributed 75% of CSE’s total revenue from continuing operations in FY13. Oil and gas related activities remain at healthy levels in most regions, in our view. CSE has significant exposure to the Gulf of Mexico (both the U.S. and Mexico side), and we expect the group to benefit from the on-going recovery following the ill-fated Macondo oil spill incident and the imminent liberalisation of the Mexican oil and gas market. There is also positive sentiment within the subsea sector. Market watcher Infield Systems has forecasted subsea capex to grow at a robust 15% CAGR from US$19b in 2013 to US$33.3b in 2017. CSE provides control systems for its subsea customers. Its order book stood at S$227.2m (as at 31 Dec 2013), a decline of 18.4% as compared to end FY12. However, management highlighted that this consists of higher quality projects and hence could augur well for its FY14 gross margins.

No further provisions for project cost overruns expected
CSE’s FY13 bottomline took a hit as it made provisions for project cost overruns amounting to S$8.1m. Looking ahead, management is hopeful that it will not have to make further provisions for this Middle-Eastern project in 2014, as it has provided some buffer in terms of assumed project completion timeline when making its provisions. 

Maintain BUY
We re-work our assumptions following a change in analyst coverage, and now forecast CSE to register core PATMI growth of 18.7% and 9.3% in FY14 and FY15, respectively. We are expecting a backend-loaded FY14 due to the timing of certain key projects and expectations of new order wins in 2H14. Applying a 9x target PER peg to our FY14 EPS forecast, we derive a fair value estimate of S$0.63 (previously S$0.96 before the Servelec Group divestment). Maintain BUY.

CSE Global

DBS GROUP RESEARCH, Sept 10

MANAGEMENT aims to reduce CSE's over-reliance on a single country, single sector and a single programme via divestment of UK healthcare business (~20 per cent of group profit). However, standalone healthcare business may be too small for an IPO, so management also seeks to divest UK automation business (~13 per cent of group profit). Most importantly, UK business (~33 per cent of group profit) can fetch higher PE than CSE itself, unlocking value for its shareholders. CSE intends to return most of the cash proceeds (we estimate 26-28 Singapore-cent dividend per share) to its shareholders and operate as a net cash entity, saving interest costs (~S$2 million annually or 4 per cent of profit).

Base case - IPO of UK business at 12x PE may unlock S$48-58 million of additional value. Given that UK business generated S$16-17 million profit last year, at 12x PE, CSE may fetch S$190-200 million by divesting the business after paying listing-related expenses. We argue for CSE to compensate shareholders for the loss of one-third earnings by paying them one-third of its market cap in cash before the IPO announcement was made. The cash payment would make UK business divestment neutral for the shareholders. The key benefit will be CSE reaping additional cash on its balance sheet, which can be useful in acquiring companies in the future. One-third market cap, translates to S$142 million or DPS of 27.5 Singapore cents to be paid to shareholders, while CSE could retain S$48 million-S$58 million, in our estimates.

Bear case - IPO of UK business at 10x PE may unlock S$13-23 million of additional value. Given that UK business generated ~S$16-17 million profit last year, at 10x PE, CSE may fetch S$155-165 million by divesting the business after paying listing-related expenses. We would expect S$142 million or DPS of 27.5 Singapore cents to be paid to shareholders while CSE could retain S$18-28 million.

Bull case - IPO of UK business at 15x PE may unlock S$93-108 million of additional value. Given that UK business generated ~S$16-17 million profit last year, at 15x PE, CSE may fetch S$235-250 million by divesting the business after paying listing-related expenses. We would expect S$142 million or DPS of 27.5 Singapore cents to be paid to shareholders while CSE could retain S$93-108 million.

Potential acquisitions could add S$10 million earnings (out of S$17 million lost) over the next three years. We estimate that S$100 million cash would be available for acquisitions over the next three years. Out of this (i) about S$50 million cash could be retained from IPO of UK business after returning cash to the shareholders (ii) another S$17 million free cash flow could be generated each year (40-45 per cent of earnings) given dividend payout ratio of 40 per cent. We assume that CSE will pay less than 10x PE and estimate that CSE could add S$10 million earnings inorganically over the next three years. This translates to 10 per cent earnings CAGR (compounded annual growth rate) on base earnings of S$35 million in FY13 forecast.

The company could easily add S$7-10 million earnings organically over the next three years. This translates to an additional earnings of S$2-3 million each year or 6-9 per cent earnings CAGR over 2013-16 on a base of S$35 million in FY13 forecast.

A healthy America should be able to offset a weaker Australia while growth should come from the Middle East, Africa & Asia. Out of its outstanding order book of S$375 million (+1.3 per cent y-o-y) at the end of Q2 2013, we estimate non-UK contribution to exceed 75 per cent.

BUY

CSE Global Limited

OCBC on 15 Aug 2013

CSE Global Limited reported 2Q13 results that were generally in-line with ours and the street’s estimate. 2Q core net profit increased 12% YoY to S$12m, mainly due to (i) the lower level of zero-margin revenue in the Middle East and (ii) higher level of more profitable offshore work in the Americas. Separately, the group disclosed that it intends to divest 100% of its ownership in its UK subsidiary through a separate listing on the London Stock Exchange. We are positive on the move. Besides unlocking value, we believe the spin-off would simplify and improve oversight of CSE’s different businesses. Maintain BUY with an unchanged S$0.96 FV.

2Q results in-line with expectations
CSE Global Limited reported 2Q13 results that were generally in-line with ours and the street’s estimate. 2Q revenue fell 20% YoY to S$116m on lower contribution from the Americas and the EMEA (Europe, Middle East & Africa), while core net profit increased 12% YoY to S$12m. The margin improvement was mainly due to (i) lower level of zero-margin revenue in the Middle East and (ii) higher level of more profitable offshore work in the Americas. Order-book was S$375m as of end-2Q13. 

Spin-off of UK subsidiary
Separately, CSE disclosed that it intends to divest 100% of its ownership in its UK subsidiary (CSE UK), through a separate listing on the London Stock Exchange. This listing will “provide financial independence to both CSE and CSE UK to facilitate future access into capital market … to pursue future growth opportunities”. The listing is expected to be completed in 2013; part of the net proceeds will be returned to shareholders. CSE will continue to operate and enhance the remaining elements of its business in the USA and Asia-Pacific. 

Business rationalization
Besides unlocking the value of the UK subsidiary, we believe that the spin-off would simplify and improve oversight of CSE’s different businesses. Over the years, the group has grown to such a size that makes management control difficult. This led to several issues, including cost over-run in two Middle East projects (2011), and lower-than-expected margin in its onshore work in the USA (2012). We believe management is now working to rationalize its businesses and improve its control. 

Maintain BUY with unchanged S$0.96 FV
We cross-checked our valuation using SOTP methodology and found that our current FV also reflects the break-up value. Please see Exhibit 2 for more details. Maintain BUY with an unchanged S$0.96 FV.

CSE Global

OCBC on 16 May 2013

CSE Global reported 1Q13 results that were in-line with ours and the street’s estimates. 1Q revenue fell 10.9% YoY to S$120m on lower contribution from the Americas and EMEA (Europe, Middle East & Africa), while PATMI was flat at S$12.7m. After encountering issues in the Middle East in 2011 (cost overrun at two large telco projects) and the Americas in 2012 (lower-than-expected margins for onshore work), CSE Global now appears to be more keen on the higher margin brownfield projects, while carefully re-evaluating the lower-margin greenfield jobs. We now expect a slight contraction or modest growth in the top-line across FY13-14F and gross margins to stabilize around 30%. We have tweaked our model slightly and our FV declines to S$0.96 (previously S$0.99) on 10x FY13F PER. Maintain BUY.

1Q net profit in-line
CSE Global reported 1Q13 results that were in-line with ours and the street’s estimates. 1Q revenue fell 10.9% YoY to S$120m on lower contribution from the Americas and EMEA (Europe, Middle East & Africa), while PATMI was flat at S$12.7m. The improvement in net margin (1Q13: 10.5%; 1Q12: 9.4%) was due to (i) lower amount of zero-margin revenue in the Middle East (as the loss-making projects were nearing completion), and (ii) a larger amount of high-margin offshore work in the Americas. 

Focus on profitability
After encountering issues in the Middle East in 2011 (cost overrun at two large telco projects) and the Americas in 2012 (lower-than-expected margins for onshore work), CSE Global now appears to be more keen on the higher margin brownfield projects, while carefully re-evaluating the lower-margin greenfield jobs. Against this backdrop, its order-book declined to S$361.1m as of end 1Q13 (end 4Q12: S$384.5m) as the new orders secured (S$95.4m) were lower than its normal run-rate of S$120-140m per quarter. However, management assured us that the existing order-book consists largely of good-margin jobs. 

Reclassification of certain costs
Meanwhile, CSE Global re-classified certain costs associated with staff costs (e.g. social security) from below the gross margin into the “cost of sales” for consistency across different business units within the group. Consequently, gross margin is lowered by 2-3%, although there is no impact at the net profit margin level. 

Margins to stabilize
We now expect a slight contraction in the top-line for FY13F, followed by a modest 13% organic growth for FY14F. In terms of profitability, we think that gross margin should stabilize around 30%. We have tweaked our model slightly and our FV declines to S$0.96 (previously S$0.99) on 10x FY13F PER. Maintain BUY.

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.

CSE Global

OCBC on 1 Oct 2012

We continue to like CSE Global (CSE) and believe that it is still in the early stages of its turnaround story. As a brief recap, CSE was previously hit by a confluence of negative events, such as cost over-runs and unexpected customer delays. Since then, we noted that the telecom division, which had encountered the cost overrun issues, appeared to be turning around. Operations have been stable so far and the financial performance is also improving. At the group level, CSE has strengthened its balance sheet by (i) selling off its non-core assets to pare down loans, and (ii) refinancing its short-term borrowing with long-term debt. The group now has more flexibility in financing larger projects or pursuing M&A deals. Its experienced former Group MD has also returned to the group as a Non-Executive Deputy Chairman to look into investment opportunities. Maintain BUY with an unchanged S$1.09 fair value estimate

Turnaround story
We continue to like CSE Global (CSE) and believe that it is still in the early stages of its turnaround story. As a brief recap, CSE was previously hit by a confluence of negative events. In 2Q11, the group incurred cost overrun of S$22m involving several telecommunications projects. In Feb 2012, it announced that the former Group MD (and a key shareholder with a 13% stake) Tan Mok Koon would be going on a sabbatical leave. Shortly after, CSE issued a profit warning and lowered its 4Q12 profit guidance on unexpected customer delays. Understandably, investor confidence took a hit then. However, we noted several operational and financial improvements over the past two quarters, reaffirming our view that the group is turning around.

Repairing the Telecom division
The telecom division that encountered the cost over-run issues appeared to be on the road to recovery. A new MD joined the division last year, and operations have been stable so far. Having achieved operational breakeven (EBIT) in 1Q12, CSE Transtel reported profit after tax of S$0.7m in 2Q12. The division is still working on the two difficult Middle East projects, scheduled for completion by Mar 2013. But we believe the worst is over and the group’s gross margin should revert to its typical 33-37% over the medium term horizon (FY11: 32%; 1H12: 30%).

Stronger financials
Meanwhile, the group has strengthened its balance sheet by (i) selling off its non-core assets to pare down loans, and (ii) refinancing its short-term borrowing with long-term debt. As a result, CSE now has more flexibility in financing larger projects or pursuing M&A deals.

Maintain BUY with S$1.09
The group recently announced that former Group MD Tan Mok Koon will end his sabbatical leave and return as Non-Executive Deputy Chairman to look into investment opportunities. We believe CSE would benefit from his rich experience. Maintain BUY with an unchanged S$1.09 fair value estimate.

CSE Global

OCBC on 15 Aug 2012

CSE Global reported a decent set of 2Q12 results that were in line with ours and the street’s expectations. 2Q revenue was S$144.2m, up 42% YoY, on increased sales to USA, Europe/Middle East/Africa, while net profit was S$21.1m, helped by a S$10.0m one-off gain in disposal of associate company eBworx. The group’s telecom division reverted to profitability during the quarter with profit after tax of S$0.7m. CSE Global’s balance sheet also looked more stable as it lowered its gearing with cash proceeds from eBworx sale, and refinanced its short-term borrowing with a S$120m 3-year banking facility. Maintain BUY with a higher fair value estimate of S$1.09 (previously S$0.80).

2Q net profit S$21.1m
CSE Global reported a decent set of 2Q12 results that were in line with ours and the street’s expectations. 2Q revenue was S$144.2m, up 42% YoY, on increased sales to USA, Europe/Middle East/Africa, while net profit was S$21.1m, helped by a S$10.0m one-off gain in disposal of associate company eBworx. Gross margin was 28.3% for the quarter, below its typical 33-37% level. This is mainly due to the recognition of S$7.5m of zero-margin revenue on on-going Middle East projects and an increase in on-shore greenfield gas projects in USA which yielded lower margin than the traditional offshore work. The group also declared an interim dividend of 1.5 Scts for 1H12 (1H11: nil).

Operational improvement at Transtel
CSE Transtel – the telecom division that encountered the cost over-run issue last year – appears to be on the road to recovery. Having achieved operational breakeven (EBIT) in 1Q12, CSE Transtel now reported profit after tax of S$0.7m in 2Q12. The division is still working on the two difficult projects, and these are scheduled for completion by March 2013. We estimate the remaining unrecognized contract value to be ~S$12m, and it is likely to be booked as zero-margin revenue in the coming quarters.

Stronger balance sheet
During the quarter, CSE Global utilized sale proceeds of eBworx (S$21m) to pay down its debt, resulting in a lower gearing of 0.26x as of end June 2012 (end Mar 2012: 0.30x). It also refinanced its short-term borrowing with a S$120m 3-year banking facility.

Maintain BUY with higher fair value
We updated our model with 2Q results and increased our valuation peg to 9x (previously 7.5x) on operational and balance sheet improvements. This raised our fair value estimate to S$1.09 (previously S$0.80). Maintain BUY.

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.

CSE Global

UOBKayhian on 20 June 2012

Investment Highlights
· High cash conversion of profit allows for a healthy cash balance. CSE Global (CSE) normally converts 70% of its PATMI to cash over the course of two financial years. As the company has minimal cash requirements, the excess cash balance should allow the company to sustain future payouts, investments for organic growth, and strategic acquisitions.
· Gross margin to be sustained at mid-30%. Around 70% of CSE’s total revenue will continue to come from its automation segment, which provides solutions to a broad range of industrial sectors. CSE intends to continue to increase their greenfield and brownfield projects in this segment, where the gross margins are 15-30% and 40% respectively.
· Expect better overall 2012 performance from healthy orderbook and recurring revenues. As of 1Q12, CSE’s total orderbook stood at S$398m as compared to S$392m in 1Q11. Typically, 45% of the orderbook generates recurring revenue for the company as these consist of maintenance projects. Management is confident that 2012 performance will be better than 2011’s and that it can sustain an overall growth rate of 5-15%.
· Healthcare segment to continue to derive business from the UK. CSE’s healthcare business is unlikely to venture into new markets in the near term as systems have to be highly customised to suit a country’s adopted healthcare platform. Developing new systems for other countries has historically proven to be very difficult with concerns on capital needed, economic soundness, and specifications imposed by the government. As of 1Q12, CSE still had S$75m worth of greenfield contracts to implement until 2016 in the UK.
· Writedown of S$21m in 2011 highlights risk of human error. In 2011, CSE recognised a significant one-off loss of S$21m (40% of 2010 PATMI) from misquotations by their employees in four projects in the Middle East. While measures have been placed to detect such lapses in due process, management notes that human error cannot be fully mitigated. Human error can be brought about by inexperience, lack of skill or expertise, and incorrect decision-making.
· Sustained dividend payout should support share price. CSE has maintained a payout ratio of 40% even in 2011, when its earnings dropped significantly. Management intends to uphold this payout policy going forward.
Valuation
· CSE is currently trading at 14.6x 2011 earnings, versus 8.5x 2009 earnings and 7.4x 2010 earnings. The company reported significantly lower earnings in 2011 because of its one-off loss recognition. Based on Bloomberg’s consensus estimate, CSE has a 12-month target price of S$0.86 and is set to report earnings growth of 110.5% in 2012 to S$58.2m.
· CSE’s 5-year historical average PE of 11.3x and consensus EPS of 11.0 S cents translates into S$1.24/share, representing an upside of 61% from the last traded share price.

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.

CSE Global

OCBC on 9 May 2012

Hitachi Limited’s takeover offer for eBworx has turned wholly unconditional effective yesterday after the former had received more than 85% acceptance. CSE Global (CSE) will sell its entire 30.94% stake in eBworx for M$0.90 per share and book a one-off divestment gain of S$10.3m in 2Q12. The net consideration received of S$21.4m will be used to repay its bank loan. While we like the latest development, we think that investors will be more keen to see operational improvements in its core business. We adjusted our model for the transaction, but we remain cautious and keep our HOLD rating (and fair value estimate of S$0.80) ahead of its 1Q12 results later this week.

eBworx takeover to proceed
Hitachi Limited’s takeover offer for eBworx has turned wholly unconditional effective yesterday after the former had received more than 85% acceptance. CSE Global (CSE) will sell its entire 30.94% stake in eBworx for M$0.90 per share and book a one-off divestment gain of S$10.3m in 2Q12. The net consideration received of S$21.4m will be used to repay its bank loan. We estimate this will improve its net gearing ratio by at least 10 percentage points (end-Dec 11: 34.6%).

Divestment of non-core business
As a brief recap, e-Bworx was originally part of CSE’s e-solutions business, but was later spun off and listed on MESDAQ in 2003. By 2011, CSE’s stake in eBworx had declined to 30.94%. We believe there are little synergies between the operations of the two businesses. CSE provides system integration work for the energy, infrastructure and healthcare sectors, and its jobs are largely project-based engineering work. By contrast, eBworx offers consulting services and software solutions to mainly banks in Asia. Therefore, we welcome the move by CSE to divest its non-core assets and strengthen its core business. As mentioned in our earlier report (dated 10 Apr 12), we also feel that the offer price for eBworx (M$0.90 per share or 15.7x FY11 EPS), is attractive.

Look for operational improvements in core business
While we like the latest development, we think that investors will be more keen to see operational improvements in its core business. Recall that the group has encountered serious cost over-run issues in FY11 that hurt investor’s confidence. We adjusted our model for the transaction, but we remain cautious and keep our HOLD rating and S$0.80 fair value estimate ahead of its 1Q12 results later this week (even though there is an technical upside of 11%). Excluding the one-off gain of S$10.3m, CSE’s shares are currently trading at 8.4x FY12F EPS (vs STI’s 9.4x).