SINGAPORE (April 22): When Malaysian engineering firm Serba Dinamik Holdings became the largest shareholder in systems integrator CSE Global last year, both parties talked about how they could work on projects together. One year on, no joint venture projects have been announced, as the companies are still trying to better understand each other’s capability.
“We do have some ideas on how to go forward, but we still need to work with our customers and see how we can, together, come up with some solutions or projects for their customers and ours,” says CSE’s group managing director Lim Boon Kheng in an interview with The Edge Singapore.
In April 2018, Serba paid eight CSE shareholders 45 cents per share, a 15% premium over the market price then, for a combined stake of 24.8%. Both companies, with their engineering focus, are seen as complementary in terms of market reach. CSE operates primarily in the Americas, Singapore, Australia and New Zealand, while Serba Dinamik is more active in Malaysia, Indonesia, United Arab Emirates, Bahrain and the UK. The market had reacted positively to Serba Dinamik’s majority stake, with CSE’s shares increasing by 7% on April 15, 2018; it had been performing poorly since the oil and gas slump in 2014.
While joint ventures with Serba Dinamik have yet to materialise, CSE was able to generate earnings growth for the financial year ended Dec 31, 2018 by delivering projects it won on its own. Revenue for the year inched up 4% over FY2017 to $376.8 million. However, operating expenses were down 11% y-o-y to $80 million in the same period, as it was no longer dragged down by the impairment of receivables incurred in FY2017. As a result, earnings grew 50.8% to $20.1 million from FY2017.
CSE plans to pay a final dividend of 1.5 cents for FY2018, bringing the full-year total to 2.75 cents, which is the same as in FY2017 and FY2016. Lim and chief financial officer Eddie Foo note that the company has been consistent in the amount paid out and will maintain it as long as it remains profitable.
Investors have shown their appreciation for the earnings improvement. Year to date, CSE shares have gained some 38% to close at 52 cents on April 15. At this level, the shares are trading at a historical price-toearnings ratio of 13 times, which gives the company a valuation of $266.7 million.
For FY2018, CSE won $384.2 million in new orders, slightly higher than the $381.9 million in FY2017. The bulk of the orders are from large infrastructure projects in Asia-Pacific. New orders also came from greenfield and brownfield projects in the Americas and Australia.
For the company’s management, having led CSE through the oil and gas slump, the challenge now is to try to find new growth areas and continue to improve on earnings. “We are pretty confident we will have y-o-y growth, higher profit, higher revenue in 2019,” says Lim.
His confidence stems from the nature of CSE’s business of providing engineering services for large-scale projects such as those in infrastructure. Such projects require years of planning and are unlikely to be aborted midway. Based on its clients’ current investment plans, Lim is confident it will continue to enjoy growth.
Shale expansion
Unlike many other Singapore-listed engineering companies that are active across the region, CSE’s largest market is in the US. Lim says the reason is simple. “We fish where there is fish,” he says.
Since FY2015, CSE has been “fishing” actively in the onshore O&G market in the US. Its revenue split between offshore and onshore markets in that market was 90% versus 10%. For FY2018, with active competition for onshore projects, the revenue split has changed to 54%:46%. “If we continue to work in the offshore market alone, we will be very curtailed in our operations. So, we decided to move onshore,” says Lim.
CSE now operates in the Permian Basin and Eagle Ford in Texas. Lim says there is potential for CSE to build a stronger presence in these regions. It is also exploring the possibility of enhancing its operations in Oklahoma and Denver, where it is currently “not firmly anchored”.
A study by Norwegian research company Rystad Energy notes that shale production may not bring as much profits as companies envision. The report studied 33 of the largest shale operators in the US, representing 39% of US shale production, and highlighted that they had difficulty paying debt. Nonetheless, Lim and Foo maintain that CSE can overcome these challenges as it offers a wider variety of engineering services and is not focused solely on shale production in the US O&G market.
Smart city
Even as it expands overseas, CSE is not neglecting its home market. The company is keen to benefit from the government’s vision of turning Singapore into a smart city. Lim believes the company’s engineering mindset enables it to provide initiatives that are smart and productive.
In 2018, CSE won $150.5 million worth of new infrastructure project contracts, including a large government project in Singapore. The company expects to win more such projects this financial year, with earnings from these projects to be recognised from the second half of 2019.
CSE is also trying to win more business by providing control systems that can help reduce waste, save energy and cut back on the use of water — by making the process more efficient. “We are already doing this in Australia, so we are confident that this is something we can do in Singapore as well,” says Lim.
Lim and Foo stress that CSE is acquisitive in nature, so it is constantly on the lookout for industries and additional services it can venture into. They add that the company is geographically restricted to its current markets and does not have immediate plans outside these areas.
Greater fear
With almost every industry being concerned about the effects of Brexit and the US-China trade war, CSE is no different. Lim says the uncertainty arises from the effect the events will have on its customer’s investment decisions.
Lim adds that a bigger obstacle is attracting the right talent to conceptualise and execute its projects. CSE’s earnings profile has c hanged because the team has changed. “Today’s team is completely different from the team in 2014. We promoted half of the people and got new talent. We let people go because they were living in the past. We cannot change the organisation if we are doing the same old thing — you have to go, rejuvenate, bring in new talent and promote the next level up,” says Lim.
Four brokerages — RHB, UOB Kay Hian, KGI Securities and CIMB — maintain active coverage on CSE’s stock. After the release of its FY2018 results, the analysts are maintaining “buy” calls on the stock, with target prices ranging between 58 and 62 cents.
KGI analyst Joel Ng likes CSE for its attractive valuations, solid balance sheet, asset-light model and stable recurring cash flows. “We maintain our ‘buy’ recommendation and believe that average earnings per share growth of around 16% per annum over the next three years is achievable on the back of improving industry dynamics,” he says in a report dated March 4. He anticipates the company’s main risk to be margin pressure from competition and foreign exchange risks from its exposure to currencies such as the US dollar, Australian dollar and the euro.
