An encouraging start (CIMB)

In a sub-par growth environment, it is essential for small-to-mid-sized companies to leave no stones unturned. CSE is doing just that, scouring the world for investment opportunities to augment its organic growth. CSE’s internal growth met our expectation for 1Q.

At 23% of our FY13 numbers, 1Q core earnings were broadly in line with our expectation and consensus. We trim our FY13-15 EPS estimates by 2% for slightly lower turnover. Maintain Outperform with a slightly lower target price, still at 8x CY14 P/E, 0.5 s.d. below its 5-year mean. Catalysts could come from M& As as well as stronger orders and quarters.

An encouraging start

CSE made an encouraging start in 1Q. Though revenue fell 11% yoy to S$120m (lower activities across all segments), profitability improved as the group recorded similar earnings (S$12.7m) vs. the previous year. One negative though was the lower-than-expected order intake of S$95.4m. We now expect CSE to secure S$500m orders for FY13 (previously S$550m), leading to our cut in estimates. Its order book stands at S$361m. CSE generated operating cash inflow of S$16.9m (almost double that of 4Q12), bringing its net gearing down to 0.1x from 0.2x as at end-2012.

Segment breakdown

The Middle East underpinned earnings in 1Q. Earnings from MENA jumped 49% yoy as the loss-making projects near completion (the last of which should be delivered in 3Q). Earnings from the US also grew 25% yoy as the group shifted its attention to more lucrative offshore jobs. These two regions helped to offset the drop in profitability in Asia Pacific. Nonetheless, sizeable Australian LNG orders (i.e. Wheatstone) could flow in 4Q. We also expect a stronger pick-up for Asia Pacific in 2H as recognition for the sizeable Ichthys LNG job in Australia and thermal engineering ramps up.

Resilient, diversified model

Investors’ main grouse of dimmer growth prospects (function of scalability) has been priced in. Rather, CSE’s dividend yields in excess of 5% and resilient, diversified business model lend support to our call.

 

Steady strides

While not particularly inspiring, 4Q met expectations as CSE continues tomake steady strides.Undemanding valuations and dividend yields in excess of 5% continue to lend support to our call.

At 24% of our FY12 (full-year at 99%), 4Q was in line with our expectations and consensus. We cut our FY13-14 EPS by 7-9% on lower revenue and margin assumptions. We also introduce FY15 numbers. Our target price, pegged at 8x CY14 P/E (0.5 s.d. below its five-year mean), drops accordingly. We maintain Outperform with catalysts from stronger orders, quarters and accretive M& As.

Results in line strong cashflow generation

4Q core earnings of S$11.7m increased by 23% yoy on higher revenue (from shale gas projects in the US and a telecoms project in the Middle East) and better cost control. Gross margins climbed up to 5.4%pts qoq to 36.6% (4Q11: 33.2%). Further, CSE Transtel in the Middle East has returned to profit. This is despite an additional provision of S$1.5m for one of the two significant cost-overrun projects in 2011. These projects are expected to be completed by 1H13. CSE also generated strong operating cashflow of S$35.6m for FY12 (FY11: S$6.9m outflow), bringing net gearing to 0.2x. Lastly, the group declared a final DPS of 2.75 Scts, bringing total DPS to 4.25 Scts (about 40% earnings payout).

Better late than never

Boosted by the telecoms jobs for a North-Western Australian LNG project, CSE bagged strong orders of S$160m for 4Q, bringing total intake to S$499m for FY12. The order book stands at S$385m and we are modelling S$550m orders for FY13.

Asia Pacific to drive 2013 performance

Underpinned by the Australian jobs, Asia Pacific is expected to take on the baton from the US and drive turnover for 2013. However, margins from these contracts are expected to be lower, keeping blended gross margin in the low 30% range (we expect 33.5%). Asia could surprise with a rush of thermal engineering jobs.