Systems integrator CSE Global has announced a rights issue that is expected to raise net proceeds of $33.4 million for the company.
In an SGX filing on Oct 10, the company says it intends to issue over 102.4 million new ordinary shares at 33 cents per share.
For shareholders who hold the company’s shares, they will be provisionally allotted one new share for every five shares that they hold at the record date, which will be decided on.
The issue price represents a discount of approximately 20.5% to the last transacted price of 41.5 cents on Oct 10, which was the last trading day before the announcement, and a 17.7% discount to the theoretical ex-rights price of 40.11 cents per share.
The rights issue is likely to generate $33.8 million in gross proceeds and $33.4 million in net proceeds, after deducting estimated fees and expenses.
Explaining its rationale for the move, CSE Global says it intends to utilise about 90% of the capital for potential acquisitions of synergistic businesses in New Zealand and the US, and the remainder 10% to partially repay some of the loans previously drawn down for certain business acquisitions.
CSE Global says that the potential acquisitions form part of its strategy to expand and grow its communications businesses in the infrastructure industry markets, as well as participate in an expanding sector where demand for increased connectivity and security is expected to continue to grow.
It reveals that both the potential acquisitions relate to radio and critical communications business, which the company views as a “natural complementary fit” to its business.
“It is envisaged that the potential acquisitions will strengthen the company’s existing business partner and customer relationships, as well as extend its geographic coverage into the New Zealand and US markets for its communications business, thereby enhancing its market position in these markets,” CSE Global explains.
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To demonstrate their commitment and as a vote of confidence in the company and the rights issue, CEO Lim Boon Kheng, chairman Lim Ming Seong and non-executive and independent director Tan Chian Khong have each given an irrevocable undertaking to subscribe for and pay in full their pro rata entitlements to the rights shares.
The three collectively have a deemed and direct interest of 3.21% in the company.
Furthermore, substantial shareholders Orchid 2 Investments and Orchid 3 Investments, which have a 12.27% and 12.70% stake in the company respectively, have also stated their intention to subscribe to their respective pro rata entitlement to the rights shares under the rights issue.
DBS and UOB continue to call ‘hold’
In response to the announcement, DBS Group Research has maintained its “hold” call on the stock, keeping a target price of 45 cents and 38 cent ex-rights, assuming a full subscription of the rights issue.
The brokerage is of the view that the irrevocable undertaking and expressions of intention for 28% of the rights by some directors and substantial shareholders is a display of confidence in the company.
As for the company’s outlook, DBS says it is still “promising”, except for large greenfield projects in the traditional energy sector, adding that “the flow business is still in recovery mode which should help to mitigate lower contributions from large greenfield projects.”
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The flow business refers to “complete, end-to-end 'program' solutions developed from concept to final commissioning and handover”, according to CSE Global’s website.
Meanwhile, the outlook for its infrastructure and mining and minerals segment remains supported by a steady flow of projects.
On a broader view, DBS says structural trends such as digitalisation which requires increased connectivity and security will continue to be a key driver for CSE’s infrastructure segment.
Furthermore, the brokerage believes that the company’s 2HFY2022 (ending December) and FY2023 could be brighter on the backloading of recent contract wins, in view of the supply chain disruptions.
On Oct 12, UOB Kay Hian analyst John Cheong also maintained his “hold” call on CSE Global, but lowered his target price to 38 cents to account for dilution from the rights issue.
Cheong is of the view that “this cash call amid poor market sentiment will likely create an overhang to share price.”
He highlights only Orchid 2 and Orchid 3, which are Temasek entities, along with the three directors have given irrevocable undertakings.
As such, Cheong says that assuming that no other entitled shareholders subscribe for the rights shares, the rights issue could raise gross proceeds of only $9.5 million.
He notes that the majority of net proceeds are intended to be used for acquisitions, but there is no definitive agreement that has been entered into at this moment.
However, just like DBS, he also notes the company’s strong order intake in energy and infrastructure segments.
Cheong elaborates that the order intake in CSE Global’s 1HFY2022 ending June surged by 100.3% to $421.7 million, with “broad-based growth” registered in all industry sectors.
Specifically, order intake for the energy sector rose by 124% y-o-y to $238 million in 1HFY2022.
This was mainly due to new contracts for the maintenance of integrated control systems for production facilities, as well as a large greenfield order in the renewables space relating to the installation and integration of solar power systems amounting to $79.3 million, supported by higher order flows.
In the infrastructure sector, order intake in 1HFY2022 climbed by 92.9% to $154 million as compared to $80 million in 1HFY2021.
This is mainly due to a major contract secured to provide engineering solutions for the data centre market, higher field service orders for the wastewater market in the Americas region, and stronger orders for radio communication equipment and solutions, led by utility and renewables customers in Australia.
The mining & minerals sector clinched $30 million worth of new orders in 1HFY2022, mainly from a long-term evolution system project secured for a mine site in Australia.
CGS-CIMB retains 'hold' call with same TP
CGS-CIMB Research analysts Kenneth Tan and Lim Siew Khee have kept their "hold" call with an unchanged target price of 45 cents as they await further clarity on CSE Global's acquisition targets.
Despite their unchanged target price, the analysts expect near-term share price weakness due to the uncertainty over earnings accretion from its mergers and acquisitions (M&As) along with the deteriorating macroeconomic conditions.
"We believe management is choosing to conduct equity financing as it wants to maintain a healthy balance sheet," Tan and Lim surmise. As at end-August, CSE’s net gearing stood at 0.39x compared to its gearing of 0.25x as at end-December 2021, they note.
They add that if the company had opted for debt financing, its net gearing would have risen to 0.57x.
"Considering the rising rate environment and CSE’s huge order book of $389 million as at end-1HFY2022, we believe it did not turn to debt financing in order to remain financially prudent and maintain sufficient working capital," they write.
Shares of CSE Global closed at 36.5 cents on Oct 11, down 0.5 cent or 12.04% compared to its previous close.
