CSE: Reiterate Add with unchanged TP of S$0.60, intact dividend

CSE management on 3Q earnings call: On outlook: "Uncertainty still remains -- Covid, oil & gas, economic outlook and now you can add one more, ie the change of administration in USA. Where do we see the full year of 2020? I would say that, yes, we do see negative impact from our flow business which we have anticipated. Basically, that is mitigated by the contribution from the two acquisitions -- Volta and RCS, one in the US and one from Australia – which we made in 2019. So we are confident to say that we can achieve similar financial performance for 2020 as 2019. It’s essentially the same profit level in both years."  -- MD Lim Boon Kheng (left) On dividends: "We have given guidelines in the past that we will pay up to 40% of profit as dividends. In the last five years we have exceeded that. We are always conscious of our responsibility to shareholders. We are very conscious of meeting the needs of not only our customers, our employees, but also our shareholders." -- Chairman Lim Ming Seong (right)

Excerpts from CGS-CIMB report

Analyst: Cezzane See

Core net profit up
CSE Global’s 3Q20 revenue of S$117.9m (+5.7% yoy) took 9M20 revenue to S$373.4m (+26.5% yoy).

The 9M revenue was ahead on recognition of large oil and gas (O&G) revenues and incremental flow revenues from new acquisitions.

3Q20 net profit was down (-11.6% yoy) as it was skewed by a non-recurring divestment gain of S$0.7m in 3Q19 (which created a high base effect) and higher effective tax rate levels due to more Australian projects (which fetch higher effective tax) in 3Q20.

9M20 core net profit (excluding S$3.1m net exchange gains in 1H20) was S$17.1m (+7% yoy).

Infrastructure and mining and mineral segments lift 3Q order wins CSE won S$91m (-41.7% yoy) worth of orders in 3Q20 (Fig. 2), taking cumulative wins to S$333.1m (-4.5% yoy).

While 9M20 O&G segment orders declined by 21.6% yoy, infrastructure and mining and minerals (M&M) orders grew 26.8% yoy and 51.9% yoy, respectively.

End-Sep order book was up 14.8% yoy to S$267m (vs. 9M19: S$232.6m).

Outlook
With regards to Covid-19, CSE mentioned that as most of its operations are deemed essential services, there has been no halt to activities, although mobility limitations have borne inefficiencies.

Nevertheless, there have been no material collectability issues.

With regards to the lower crude oil price environment, CSE expects fewer opportunities and lower prices in forward O&G orders but maintains that there have not been material project/order book cancellations and collectability issues thus far.

We trim our FY20-22F EPS forecasts, largely on the back of higher effective tax expenses given that there will be a higher mix of Australian projects moving forward, in our view.

Reiterate Add; infrastructure and M&M segments to mitigate O&G We think the O&G segment may see near-term sluggishness due to the low crude oil prices and the political uncertainties in America. However, a strong order backlog and continued diversification to infrastructure and M&M industries could provide a cushion in these tough times. "We also think CSE’s dividend yield would be intact on the back of continued cashflow generation." -- Cezzane See We reiterate Add with an unchanged TP of S$0.60, still based on 12x, close to its 5-year (2014-2019) average of 11.7x, but rolled forward to FY22F EPS. Potential re-rating catalysts are swifter project execution and higher-than-expected order wins. Downside risks are lower order wins and potential cuts in DPS.

Full CIMB report here. 
DBS report (target price 55 c) is here.