SINGAPORE (Aug 14): CIMB continues to rate CSE Global “reduce” with a target price of 32 cents on the back of the group’s weak 1H17 results.
Due to weaker revenue and margins, the group’s 1H17 core net profit was down 44.9% to $6.1 million.
In a Friday report, analyst Cezzane See says, “While we expected the weak 1H17 net profit, we were surprised by EBIT margin compression to 5.0% in 2Q17 due to the O&G division barely breaking even (intensifying competition) and offsetting the better performance of the infrastructure division.”
The group won $90 million worth of contracts that comprised flow projects, which brought 1H17 order intake to $208 million.
Although 2Q17 order backlog was stable q-o-q, See believes that the group still lacks large greenfield contracts to fuel its FY18 pipeline.
See: CSE Global swings to 2Q net loss of $13.8 mil
In 2Q17, the group’s net cash position narrowed to $35.2 million as compared to $55.8 million, while it also announced an interim dividend of 1.25 cents.
“We highlight that the payout of the one-off settlement charge of S$16.8m will only be effected in 3Q17,” says See.
Management explains that the $16.8 million settlement pertained to lawfully rendered oilfield services for a project in Iran in FY12-13, of which payments to suppliers in Europe were unfortunately denominated in USD.
The management also admitted that there were some lapses in controls with regards to the transaction and moving forward, has applied appropriate measures to prevent this from reoccurring.
Due to delayed execution on large projects won in 1Q17, the management expects weaker net profits in 2H17.
“In our view, gross margins (GPM) in 2H17F are unlikely be higher than the 25% in 2Q17 unless variation orders emerge,” says See.
The analyst continues to like CSE Global for its stable net cash position, the dip in EBIT margins, recent settlement news and slower large contract win trajectory cast a shadow on its future earnings prospects.
As at 11.23am, shares in CSE Global are trading 1 cent lower at 39 cents.
