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).