SINGAPORE (Nov 11): The best is yet to come for CSE Global, say analysts, as the group has garnered four “buy” calls across brokerages DBS Group Research, CGS-CIMB, KGI Securities and RHB.
Barring a 4.7% decline in earnings to $5.03 million for 3Q19 ended September from $5.28 million in the previous year, the mainboard-listed technology solutions provider posted a solid set of results across a number of other key financial metrics.
Revenue for the quarter surged 21.9% to $111.5 million due to higher contributions from the Americas and the Asia Pacific regions. Operating profit also registered a 2.3% growth to $7.1 million.
But CSE Global’s greatest asset rests in its robust order book: The group’s order intake from continuing operations had seen a near two-fold increase to $156.1 million from $80.3 million in 3Q18. Additionally, the order book stood at $232.6 million at the end of the quarter, translating into a 71.5% y-o-y growth from $135.6 million.
While CSE Global had noted that industry conditions remain uncertain in view of ongoing trade tensions and a worldwide economic slowdown, analysts appear fairly certain that the group remains poised to thrive in the near term.
Outperforming forecasts
While CSE Global’s results were largely in line with analysts’ expectations, the group’s new order wins were what outperformed their forecasts.
“New order intake almost doubled y-o-y, more than we anticipated, on the back of an increase in oil production in Americas,” says DBS analyst Ling Lee Keng in a Friday report.
“With its increase in oil & gas projects, and large contract win announced recently, we anticipate this to contribute positively to CSE’s earnings in FY20F and beyond,” adds Ling, citing the group’s recent acquisition of industrial power systems manufacturer Volta for US$25.1 million ($34.8 million).
See: CSE Global’s US$25 mil Volta acquisition seen as positive by CGS-CIMB
Moving forward, CGS-CIMB analyst Cezzane See notes that the group’s order book currently includes higher oil and gas flow contracts of $70.6 million, Volta’s order book of $46 million, mining and mineral division wins of $14 million and infrastructure wins of $25.1 million.
See: CSE Global secures 2 new oil and gas contracts in the Americas region worth $103.7 mil
“Assuming further order intake of $100 million and revenue recognition of $100 million in 4Q19F, CSE could end FY19F with an order backlog of at least $300 million (end-3Q19: $232.6 million),” says See in a Thursday report, adding that this would be the highest order backlog in the past five years for the group.
KGI Securities analyst Joel Ng highlights how CSE Global’s order wins are likely to translate into better earnings visibility going forward, as capital expenditure in the oil and gas (O&G) industry picks up.
Strong balance sheet
Ng posits that CSE Global, despite its acquisitions, still has a stable balance sheet under its belt. Although the group’s net cash position of $8.6 million in 2Q19 has since been reversed to a net debt position of $45.7 million, Ng also notes that the management’s previous indication of an upper limit of around 40-50% is still conservative given the group’s ability to generate healthy free cash flows.
“As a result of its higher gearing, we expect an uplift to its ROE,” says Ng. “We do not expect further acquisitions in the next 12 months as the group focuses on balancing between the integration of its new acquisitions and the sustainability of its dividends.”
Ling adds that the shift from net cash to net debt on the back of recent acquisitions is not insurmountable for the group. “CSE mainly relies on short-term loans to fund its operations,” says Ling, adding that these loans typically bear an interest rate of between 2.65% and 3.07%.
“We believe that [recent acquisitions] could be a strong base for its revenue, and large contract wins would lift revenue and earnings further,” adds Ling.
RHB analyst Lee Cai Ling expects the company’s debt to result in a tighter cash flow for the group in the upcoming two to three quarters.
“Upfront spending was required to fund several larger-sized projects it secured in 3Q19 and early 4Q19,” says Lee. “However, management guided for distribution per stapled security (DPS) of 27.5 cents to be maintained for FY19, translating to a dividend yield of 5.2%.”
Potential downside?
While analysts have identified several upside factors for the company and investors alike, they are quick to highlight how macroeconomic factors could potentially pose downside risks as well.
Ling identifies oil prices as a critical data point to look out for, as major geopolitical events such as the US-China trade war, Brexit and the Hong Kong protests have “dragged on longer than anticipated.”
“The International Monetary Fund (IMF) has further downgraded its projections of global growth in 2019 from 3.2% in July to 3.0% in October, citing rising trade and geopolitical tensions,” adds Ling.
Ng also says the group could also stumble on factors such as margin pressure on the back of increased competition and foreign exchange risks due to its exposure to different currencies including USD, AUD and EUR.
Despite this, all four brokerages are maintaining their “buy” calls on CSE Global. Both DBS and CGS-CIMB have raised their target prices. The former has raised its target price from 65 cents to 69 cents, while the latter’s price is up to 73 cents from 68 cents.
Meanwhile, KGI has reduced its target price to 61 cents from the previous 64 cents while RHB has maintained its target price of 69 cents.
As at 1.23pm, shares in CSE Global are trading one cent higher, or 1.9% up, at 53 cents. This translates into a price-to-earnings (P/E) ratio of 9.2 times and a dividend yield of 5.2% for FY20F according to DBS valuations.
