Excerpts from KGI Research report
Analyst: Joel Ng
|♦ We re-initiate with a BUY; our fair value of S$0.57 is based on a blended 12.5x FY2019F P/E and 2.1x 2019F P/B. CSE’s valuation is currently attractive on undemanding earnings multiple of 15/12/10x 2018/19/20F core EPS.
♦ We also visited CSE’s Australia’s operations and 8 other SGX and ASX listed companies. All the companies we met cited recovering demand on stronger tendering activities across all sectors. CSE is well-placed to capitalise on opportunities as improving industry trends lend support to growth prospects.
All the companies we met were expanding operations and cited the recovery of demand in key sectors such as O&G, mining and infrastructure." "We had a positive takeaway following our trip to Perth Australia to visit 4 SGX-listed and 5 ASX-listed companies that were active in the country.
Australia site visit. Since the oil and mining downturn began in 2015, CSE Global has successfully diversified into Australia’s infrastructure sector, mainly with the supply and servicing of 2-way radio communication systems.
We estimate that Australia now contributes 30% of total group revenues in FY2017 but >70%of EBIT, and expect more room for growth as tendering activity continues to be strong across the key sectors.
New shareholder opens up opportunities. Serba Dinamik (SDH MK), a mechanical maintenance service provider listed on the Malaysian exchange, acquired a 24.84% stake in CSE Global from eight shareholders in April 2018. As both companies are mainly involved in oil & gas projects, the acquisition could result in synergies between them.
We believe it is highly likely that Serba Dinamik could utilise CSE’s system integration products and services while CSE could open doors in markets such as the US and Australia. Serba Dinamik currently derives half of its revenues from the Middle East, a market that CSE has cut back its presence due to problems with customer payments.
Guiding for full-year 2.75 SG cents dividend; now offering an attractive 5.9% dividend yield. CSE maintained its 1.25SG cents 1H18 interim dividend, unchanged over the past 5 years. Management has maintained its guidance of 2.75 SG cents full-year dividend, which would mean a final 1.0 SG cents dividend, offering an attractive 6.4% dividend yield. It has consistently paid 2.75 SG cents p.a. over the past 4 years.
We estimate that CSE can sustain this dividend amount going forward as balance sheet remains in net cash position of S$20.9mn while free cash flows are sufficient to cover the annual dividend payout of S$14mn.
|Valuation & Action: CSE is currently trading at 15/12/10x2018/19/20F EPS - which is attractive in our view given its solid balance sheet, asset light model and stable recurring free cash flows. We thus initiate with a BUY and believe that EPS growth of >20% over the next 3 years is achievable on the back of improving industry dynamics.
Risks: Margin pressure due to competition and lower-than-expected new order wins. Foreign exchange risks due to its exposure to USD, AUD and EUR.
Full report here.