In an open letter to CSE Global's management in Feb 2018, Quarz Capital took issue with its performance. The upcoming 2Q results may put to rest some issues, if CGS-CIMB's forecasts (below) are on target. (Quarz says that together with its affiliates it is among the top 10 shareholders of CSE,  holding a substantially larger shareholding than the current management and board of CSE combined). 

Excerpts from CGS-CIMB report

Analysts: Cezzane See & Lim Siew Khee

CSE Global 2Q18F preview: Systems still go

■ We forecast 2Q18F net profit of S$4.6m (+65.7% yoy, -3.7% qoq). Net profit for 1H18F should form 50.5% of our full-year estimate.

CSE Global

Share price: 
45 c

Target Price: 
50 c

■ We assume steady revenue from O&G and infrastructure projects, and overall GPM of 26.8%.

■ 2Q18F interim DPS of 1.25 Scts (1Q17:1.25 Scts) should be intact given likelihood of positive operating cashflows as large projects hit billing milestones in 2Q/3Q18F.

■ We maintain our Add call and target price. We favour CSE for its net cash position, dividend yield of 6.1% and sustained earnings recovery in FY18F.

Steady oil and gas (O&G) and infrastructure divisions drive revenue
EddieFoo CSE 7.18bEddie Foo, CFO of CSE Global. Photo by El Lee.We estimate CSE 2Q18F/6M18F revenue of S$96.6m/S$188.8m (vs. 2Q17/6M17 revenue of S$85.5m/S$160m) on the back of firm contract executions by its O&G and infrastructure divisions.

We forecast O&G division 2Q18F/6M18F revenue of S$70m/S$135.9m fuelled by improved brownfield project flow and sustained execution of large greenfield contracts won in 1QFY17. For the infrastructure division, we estimate 2Q18F/6M18F revenue of S$24.0m/S$47.7m (Fig 1).

GPM likely steady
In 1Q18, CSE guided that gross margins (GPMs) were stable at c.26-27%.

Hence, we expect 2Q18F/6MFY18F GPM of 26.8% in 2Q18F (vs. 2Q17/6MFY17:25.7%/27.3%).

CSE guided that the competitive environment remains keen, so it will be a bonus if near term GPMs exceed 27%, in our view (Fig 3).

Maintain Add and TP of S$0.50
We favour CSE given FY18F earnings recovering (higher GPMs, firmer contract execution) from FY17’s doldrums. Its net cash position accords it a safe haven should order flows be delayed. The stock offers a committed FY18F DPS of 2.75 Scts, which implies 6.1% yield. Our target price is based on 13.5x CY19F P/E (close to its historical 5-year mean of 13.1x).

A return to positive operating cashflow?
In 1Q18, CSE mentioned that several large projects will reach billing milestones in 2Q3Q18F. We believe this implies positive operating cashflow in 2Q18F (vs. negative net operating cashflow of S$7.3m in 1Q18).

The group also said that it was confident of achieving positive operating cashflow for FY18F. We forecast FY18F net operating cashflow of S$22.4m vs. negative net operating cashflow of S$7.2m in FY17 (excluding a one-off payment of a S$16.6m penalty settlement in 3Q17) (Fig 2).

2Q18F interim dividend of 1.25 Scts intact
In its Mar 18 business and financial update, CSE said that it intends to keep FY18 DPS at 2.75 Scts; but will commit to 2.25 Scts first; and assess the additional 0.5 Scts post reviewing its 1Q-2Q18F cash position and cash generation for the year.

In 1Q18, it was still in a net cash position (1 Scts/share) and given guidance that billing cycles pick up in 2Q/3Q18F, this strengthens the case for a firmer cash position by end-FY18F of S$50.4m.

We expect FY18F DPS of 2.75 Scts to be achieved and forecast an unchanged interim DPS in 2Q18F of 1.25 Scts.

Catalysts and risks
Re-rating catalysts are higher-than-expected contract wins and better margins. Downside risks are vice-versa.

Full report here

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