CSE GLOBAL: Safe Proxy To Oil Recovery with 6.6% yield

Here's another idea for the oil & gas recovery theme. Yesterday, our article was:  REX INT'L: Substantial upside potential for share price, says management

Excerpts from UOB Kay Hian report

Analysts: Nicholas Leow & Edison Chen

WHAT’S NEW

• Initiate coverage with a BUY and PE-based target price of S$0.58. The stock offers a very attractive yet sustainable dividend yield of 6.6% supported by CSE Global’s (CSE) strong cash flow and willingness to reward minority shareholders.  -- Nicholas Leow (photo) & Edison Chen

• 32-year year track record in a business with high entry barriers. Founded in 1985, CSE is one of the few qualified system integrators in the region for the oil and gas (O&G) and communications infrastructure industries. 

Due to the nature of its work which makes it difficult for new entrants to enter, CSE has close working relationships with blue-chip customers such as Shell and Exxon Mobil, and enjoys superior pricing dynamics.

• Excellent proxy to the oil price recovery that provides safety with considerable earnings upside. While CSE experienced challenging years in 2015-17 given the slowdown in the offshore O&G business, they were still able to continue their track-record of profitability by diversifying into the high-margin infrastructure space and the onshore O&G business.

With oil prices stabilising and offshore O&G looking profitable, we believe that CSE is well-positioned and will be able to pounce on opportunities in the recovering sector and add to its bottom line.

• Expenses controlled with US tax cuts and completed “kitchen sinking”. Given that CSE holds significant US exposure, we believe that CSE will be a beneficiary of the US tax cut which sliced the corporate tax rate from 35% to 21%.

Tax savings for CSE could amount to almost S$1m p.a. Also, in 4Q17, CSE conducted an aggressive “kitchen sinking” exercise and minimal impairments should be expected going forward.

• Reaping the profits of a successful diversification. In 2015 and 2016, in light of the oil crash, CSE embarked on a series of acquisitions in Australia in an effort to become a nationwide player in the 2-way radio communication infrastructure business. Today, CSE is reaping the profits of this successful diversification into the high-margin 2-way radio communications business.

• 6.6% dividend yield given net cash position, strong cash flow and sustained order wins. For the past four years (2014-17) despite the downturn in the O&G sector, CSE has continually rewarded shareholders with a 2.75 S cents/share dividend.

With its solid net cash position, we expect 2018 and 2019 to be no different and yield 6.6% dividends backed by the recovery in earnings and strong cash flow.

• New substantial shareholder is a synergistic fit for CSE. On 13 Apr 18, Malaysian-listed Serba Dinamik bought a 24.8% stake in CSE from 8 substantial CSE shareholders at a price of S$0.45/share.

We view the acquisition as a positive development for CSE as it could likely open up new markets for CSE with the potential for JVs between the two entities. M&As remain a distinct possibility as CSE trades at undemanding valuations with strong cash flow.

Full report here.