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.