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
| Safe Proxy To The Oil Recovery With 6.6% Dividend Yield With the ability to show profits despite the oil price storm of 2015-17, CSE is now an excellent yet safe proxy to the current oil price recovery.
A net cash position, strong cash flows and order wins should sustain an attractive dividend yield of 6.6%. Initiate with BUY and target price of S$0.58, based on 15x peers’ average PE. |
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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.
| VALUATION/RECOMMENDATION • Initiate coverage with a BUY and PE-based target price of S$0.58, pegged to peers average 2019F P/E ratio of 15.0x. Given Serba’s entry price of S$0.45/share, we believe that the stock is undervalued given our expectations of a 20% 3-year EPS CAGR from 2017-20 and PEG of only 0.5x vs peers of 1.6x. • Going forward, we see potential for upside especially in 2019 as the impact of the synergies between Serba and CSE start to flow in which could come in the form of JVs or possible outsourcing of work from Serba. The stock offers an above-average sustainable yield of 6.6% backed by strong operating cash flow and the willingness to reward minority shareholders. SHARE PRICE CATALYST • Recovery in oil prices. • Large O&G project wins. |
Full report here.