Excerpts from DBS report
Analysts: Lee Keng LING & Singapore Research Team
|Well-oiled for the upflow
• Initiate coverage with BUY and 39% potential upside to S$0.65 TP
• Beneficiary of expected increase in capex of oil majors
• Riding on smart nation initiatives in Singapore; increasing infrastructure projects in Australia
Earnings growth supported by stable, high recurring revenue; attractive yield. We project FY19F-21F earnings CAGR of 15% for CSE, driven by the expected increase in capex of oil majors, and riding on the smart nation initiatives in Singapore and increasing infrastructure projects in Australia.
“Attractive dividend; implies c.6% yield. CSE continues its good track record of consistently paying dividends to shareholders. In each of the last five years, the group managed to pay a dividend of 2.75 Scts per share, averaging a dividend payout ratio of c.60%. We expect this trend to continue, given CSE’s strong operating cash flows.”
About 90% of CSE’s total revenue is generally recurring in nature.
This stable stream of revenue, coupled with its high customer retention rate and strong operating cashflows should support a consistent DPS of 2.75Scts p.a, or attractive yield of c.6%.
Benefitting from expected increase in capex of oil majors; margins expansion from undertaking more profitable projects. With oil prices stabilizing above US$50/bbl in the past one year (breakeven for crude oil: c.US$40/bbl) and an optimistic outlook on the demand for oil in the long term, the collective capex of the four oil majors are expected to grow at a CAGR of c.11% from 2Q19 to FY21F.
In addition, its focus on more profitable projects in U.S. and margins-accretive acquisition will lift earnings.
|Riding on smart nation initiatives in Singapore; Increasing infrastructure projects in Australia. CSE will be pursuing more Singapore government projects to capitalize on the smart nation initiatives.
In Australia, more infrastructure projects in fast-growing cities should lead to a growing demand for provision and installation of a variety of control systems as well as turnkey telecommunication network and security solutions, in which CSE specializes.
Valuation: Initiate with BUY, TP of S$0.65 for 39% upside. Our TP is pegged to 5-year average PE of 12.0x on FY20F earnings.
Key Risks to Our View: Steep drop in oil prices, global macroeconomic slowdown, lack of new order wins.
Full 20-page report here.