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).