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NRA Capital Pte Ltd

Written by: Jacky Lee

Thursday 14 May 2015

CSE Global – 1Q15 results briefing

Oil production activities remain robust

We consider CSE’s valuation attractive given its good track record, strong balance sheet, dividend yield of 5% and reasonable ROE of 16%.

Despite the fact the Oil & Gas industry’s operating environment remains challenging, CSE Global’s 1Q15 revenue saw an increase of 13% yoy to S$105.5m, driven mainly by higher contribution from the Americas and EMEA regions, which increased by 28% and 23% yoy respectively. However, this was partially offset by 5% yoy sales decline in the Asia Pacific region. Including higher EBIT margins, close to S$1m doubtful debts and higher taxation (due to higher contribution from the Americas and tax deduction received in 1Q14), pretax profit and net profit increased by 21% and 1%, respectively.

CSE Global Limited (CSE) is a systems integrator provider and operates mainly in the oil and gas industry (more than 70% of its total revenue contribution). Other sectors include petrochemical, utilities, public infrastructure, environmental and healthcare industries. The company started its operations in 1985 as the engineering projects division of ST Technologies. A management buy-out was successfully concluded in 1997 and the company was listed on SGX in 1999. Since its establishment, CSE has grown to employ over 1,300 employees worldwide, operating a network of 30 offices across the globe and is today one of the world's largest independent system integrators.

Its process control solutions utilize supervisory control and data acquisition systems, distributed control systems, programmable logic controllers (PLCs), motors, drives and plant transducers.

Key takeaway from results briefing:            

  • With the current low oil price and keen competition, management expects the operating environment to remain challenging.
  • The lower capex spending from its customers translate to a general lack of greenfield projects. However, brownfield projects remain stable.
  • Exploration and drilling activities were suspended in overall regions. However, America’s brownfield customers are ramping up production to improve efficiency cost.
  • Excluding capex deprecation cost, the processing cost for USA oil producers are now around US$10-$20 per barrel.
  • 1Q15 new order increased by 40% yoy to S$103m, mainly from the Middle East, Africa and Americas regions. Total order book remains strong at S$253m (+22% yoy).
  • The group is more optimistic of its prospects for this year after securing good order flow which started in 1Q.
  • Despite lack of opportunity for large greenfield projects, the group continues to see opportunities available in the market which continue to support and service its existing installed base of customers (brownfield projects).
  • Currently, about half of its revenue are recurring or from its brownfield projects.  
  • Net cash expected to increase as Liquefied Natural Gas projects in Australia move to Final Acceptance Test stage.

Our view:

At S$0.59, CSE trades at 1.3x PBR and 8.3x consensus FY15 PER. We consider its valuation attractive given its good track record, strong balance sheet, healthy dividend yield of 5% and reasonable ROE of 16%. The consensus S$35.6m net profit forecast is almost flat yoy from FY14. We believe CSE could achieved higher net profit in FY15 than FY14 given its current order book visibility as well as improving EBIT margins.

However, two things what need to watch are its doubtful debts and taxation. The group made allowances of S$0.9m for doubtful debt due mainly to its oil and gas customer’s delays in payment. The higher taxation is mainly due to higher corporate tax liable on its income from America. 

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