Excerpts from analyst's report

yeozhibinCIMB analyst: Yeo Zhi Bin (left)

At 72% of our FY14 forecast, we deem CSE’s 9M14 core net profit of S$25.0m as in line with expectations. 3Q14 core net profit of S$9.4m was in line, at 27% of our FY14 forecast, following four consecutive quarters of earnings misses. 

We trim FY14 EPS by 2% due to higher taxes but keep our FY15-16 EPS forecasts. Given its stabilising operations and FY14-16 dividend yields of 4-5% that would be supportive of valuations, we turn positive on CSE and upgrade it from Reduce to Hold. Our target price (70 cents) is raised as we roll over to 9x CY16 P/E (its 5-year mean) from 9x CY15 P/E.

We will revisit the stock once there are stronger-than-expected earnings and orders.

In-line 3Q14 results
building10.14CSE operates out of this building in Ubi View, three doors away from Serial System. CSE’s 3Q14 revenue rose 15% yoy to S$112m on the back of increased instrumentation and electrical installation activities on board offshore platforms in the US Gulf of Mexico (GOM), contributions from the Ichthys LNG projects (absent in 3Q13) and more activities for Australian brownfield mining projects. Turnover from Europe/Middle East/Africa (EMEA) dropped 21% yoy as the projects there approached tail-end.

We expect EMEA activities to remain muted over the next 2-3 quarters. 3Q14 gross margin remained stable at 28% but CSE’s core net profit increased at a faster rate to S$9.4m (+40% yoy), thanks to better cost management. Its SGA costs fell to 15.6% of sales in 3Q14 (3Q13: 17.2%). As most of its legacy projects have been delivered, the telecom division’s profit contributions have risen over the last two quarters.
Effective tax rate was higher-than-expected, at 28.9% in 3Q14 due to the higher profits from the US operations. CSE is still in a net cash position of S$12m. 

Encouraging order intake
With more offshore instrumentation and electrical work in GOM, CSE secured S$119m orders in 3Q14, bringing YTD orders to S$288m (+6% yoy). 3Q14 order intake was CSE’s strongest since 4Q12. Its order book stood at S$202m (+4$ qoq) at end-3Q14.

FY14-16 dividend yields of 4-5% support valuation
Given its stabilising operations and mean valuation of 9x CY16 P/E, we find it difficult to be scathing on the stock. However, we find it difficult to turn truly positive on CSE due to the lack of catalysts. The stock’s FY14-16 dividend yields of 4-5% are supportive of current valuations, in our view. Hence, we upgrade the stock from Reduce to Hold. 

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