SINGAPORE (May 29): Things are looking up for systems integrator CSE Global, despite the ongoing health-turned-economic crisis and resulting oil prices slump. The company clinched $127.2 million in new orders for 1QFY2020 ended March, across its operations in oil and gas (O&G), infrastructure and mining. This is a 46.6% increase from the $86 million worth of orders secured in 1QFY2019, the company announced on May 4.
The bulk of the 1Q orders of some $87.8 million came from customers in the O&G sector, while $25.5 million was from its infrastructure operations. The remaining $13.9 million comes from the mining sector. Together with existing projects, CSE’s order book amounted to $302.7 million as at March 31, up 66.9% from 1QFY2020.
Managing director Lim Boon Kheng says he is “pleased with the good order intake”. However, he is bracing himself for a hit in orders and a consequent decline in the company’s earnings for this FY2020 ending Dec 31. “The current market environment presents numerous uncertainties going forward in terms of the Covid-19 pandemic, low oil and gas prices and a weak global economic environment,” he tells The Edge Singapore in an interview.
“So far for us, there has been no material negative impact on our operations till March, but we are not sure how our order book and revenue will pan out from April onwards. We have to monitor them on a monthly basis”. Still, he stresses “there will certainly be a negative impact — but how much, the quantum and the magnitude of it on CSE cannot be ascertained at this time”.
CSE operates primarily in the Americas, Singapore, Australia and New Zealand. It also has operations in Europe, the Middle East and Africa. Its work in the US is focused on green and brownfield offshore and onshore O&G projects, transportation, power utilities, waste and wastewater utilities. It is also involved in the mining of minerals such as coal and gold. In Australia and New Zealand, the company provides mostly telecommunications services for the national transport operators. In Singapore, the company handles infrastructure-related projects.
Business as usual
Despite the lockdowns and movement control restrictions imposed globally to curb the spread of Covid-19, Lim says it is business as usual for CSE. This is because its projects across the different geographies are deemed essential. For instance, the maintenance of its telecommunications lines in Australia cannot stop so that communications will not be disrupted. Meanwhile, the maintenance work of Singapore’s Electronic Road Pricing (ERP) gantries — suspended from April 6 following Singapore’s “circuit breaker” measures to stem the pandemic — have to continue as well. “These are systems that are used frequently, so Covid or no Covid, they must be maintained,” Lim explains.
Elsewhere in the US, he notes that mining and shale production works are still going on, albeit at a smaller scale. Some players have shut down because of the lower oil prices following the slump on March 9 after top oil exporter Saudi Arabia slashed oil prices by the largest margin in two years. This comes after the Saudi-led Organisation of Petroleum Exporting Countries fell out with Russia over a need to support prices by scaling back production amid the ongoing Covid-19 spread. Oil futures plunged into the red, and prices have since began to trend upwards with the Brent Index for crude oil rising 18% to US$35.75 ($50.60) per barrel.
Still, analysts are cautious over CSE’s prospects. DBS Research Group analyst Ling Lee Keng says, “we initially did not expect the slump in oil prices to worsen and to persist for such an extended period of time. The Covid-19 pandemic has shocked the demand for oil through the closure of businesses and international borders”.
While the decline has been partially offset by shut-ins of oil wells and supply cuts by oil-producing nations, Ling expects CSE’s projects to take a hit. “The protraction of the pandemic is likely to put off any new oil projects during this period and could weigh on CSE’s existing small contract renewals,” she observes in a May 6 note.
CSE’s Lim says he has observed two kinds of behaviour from CSE’s business partners. Some of the companies try to keep a rein on costs by cutting operating expenditures. The majority, according to him, chose to cut capital expenditures instead. “We are in constant discussion with our partners on these cuts — some are more generous than others so their cuts may be by a smaller extent. But others who are harder hit may cut costs more” says Lim. Such costs translate to smaller order intakes and a reduction in renewals, particularly in the duration the pandemic lasts for.
Nimble player
Despite the bleak outlook, Lim remains unfazed. “We have gone through the O&G downturn previously [in 2018], so we are now more prepared to deal with the downturn expected from the Covid-19 crisis,” he reiterates. Preparations are already underway starting with assessing the needs of O&G companies, and modifying their projects accordingly based on the clients’ new budgets.
“Say a company has cut 30% of its capital expenditure — that leaves it with 70% of funds still available for projects. And that is a lot of money that we can still tap on,” Lim reasons. His game plan involves utilising CSE’s small size to be “nimble and innovative”. “We are a systems integrator with strong engineering capabilities. So, we can tap on this to cater to what customers want,” he points out. “Being small means we can provide more cost-effective solutions which puts us in better light than our competitors”.
To broaden the capabilities CSE can offer its customers, Lim is looking for companies to acquire — despite this economic downturn. His main criteria are: The company must be earnings accretive regardless of its size and it should be based in a market CSE is already present in. “If you ask me to consider venturing into say Vietnam, my answer is no, simply because we have no people there,” he explains. “It is important for us to go where our people are, so we can leverage on their expertise and ground work even before travel restrictions are eased”.
In 2018, Malaysian engineering firm Serba Dinamik Holdings took a strategic stake in CSE. With some 25%, Serba is now CSE’s largest shareholder. Two years on, Lim says that this relationship is bearing fruit. The companies have an “ongoing collaboration”, particularly on projects in the O&G sector. “Our goal is still to work together and get some projects together. We have not deviated from that,” says Lim, adding that these projects are mainly in Southeast Asia, where Serba has a strong footing. “Where they are, we try to collaborate. But we have an understanding that they can [collaborate] with someone else, if they are more cost-effective and offer better solutions and better prices”.
Aside from this, Lim says that the company is benefiting from its recent acquisitions of Australia-based RCS Telecommunications in the mining and minerals segment as well as US-based telephone operator Volta. Through RCS, CSE deepened its foothold in Australia, bringing a $42.4 million revenue to its mining sector in FY2019, from $15.7 million the year before. Meanwhile, its partnership with Volta is slated to bring in between US$50 million to US$60 million increase in revenue in the US.
Global uncertainty
Given the immense global uncertainty, Lim acknowledges that he does not have perfect visibility on what lies ahead for CSE. The company rewarded shareholders with a consistent dividend of 2.75 cents per share for FY2017 to FY2019. Lim feels the pressure to deliver a decent dividend payout, but that is something he says cannot guarantee.
CSE fell to as low as 32 cents on March 19, from 56 cents at the start of the year before recovering somewhat to close at 44 cents on May 26. At this level, analysts are starting to see more value emerging.
According to CGS-CIMB’s Cezzane See, CSE — compared to 2014–2016 when the oil market was in a slump — now appears to be stronger following several acquisitions. “CSE now sees more onshore work (shale) and Australian communications businesses [which are] both less cyclical than offshore O&G projects,” See says in her March 25 note.
RHB analysts Jarick Seet and Lee Cai Ling also believe that the M&A made by the company will help drive growth. “CSE has had a good track record in successfully acquiring earnings-accretive companies, which has helped boost earnings over time,” they say.
However, DBS’ Ling — while optimistic of CSE — has her reservations on its ability to win significantly more orders during this pandemic. “The protraction of the pandemic is likely to put off any new oil projects during this period and could weigh on CSE’s existing small contract renewals,” she notes.
Ling expects CSE’s total new order intake dropping 9.3% to $476 million for FY2020F from the $525 million logged in FY2019. Of this oil & gas orders are slated to hit $330 million (–10.7%), infrastructure wins to come in at $96 million (–3.9%) while mining and materials logs $50 million (-9.1%). With lower order book growth, Ling has cut her earnings estimates for the company for this year and next by 8% and 9% respectively.
See, Seet and Ling have “buy” or “add” calls on CSE, with See posting a 35 cent call while the other two post 45 cents. This is up 1.5 cents from the 43.5 cents CSE closed on May 27.
