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.