Excerpts from DBS Research report
Analyst: LING Lee Keng
| Slightly disrupted flow Oil price plunge to only slightly impact Oil & Gas business; cut growth assumption for FY20F to zero vs 10% previously.
These renewals are based on the longer-term outlook on oil price and are not affected by short-term volatility. The balance of c.10% is from the large contracts from O&G and Infrastructure divisions that were already secured. |
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MD Lim Boon Kheng. Photo by Ngo Yit SungWe have revised down our assumed growth for its O&G recurring business segment to 0%, from 10% previously.
O&G EBIT margin in FY2020F is lowered to 5.9% from 6.1%.
We are maintaining our assumption of no new large order wins in FY2020F and FY2021F.
As a result, FY2020F/21F earnings were cut by 7%/6%.
Maintain BUY with a lower TP of S$0.65, with catalysts possibly coming from large infrastructure project wins.
Where we differ: We are more optimistic on the outlook for CSE, on the back of its strong order book organic growth as well as through acquisitions.
Potential catalysts: 1) Large contract wins, 2) Recovery in oil price
Maintain BUY with a lower TP of S$0.65 (previously S$0.70). A lower TP of S$0.65 is derived from its 5-year average forward PE of 12x FY2020F earnings. Key Risks to Our View: Persisting low oil prices, global macroeconomic slowdown, lack of new order wins. |
| Large Infrastructure contracts near-term catalysts |
While we are not expecting any upside or downside surprises from its O&G business segment, its Infrastructure business could spring a surprise through large contract wins.
With the COVID-19 slowing down business activities, the Singapore government has indicated that it will deploy a S$6.4bn package in its Singapore Budget 2020 to support the economy.
Within this package, S$1.0bn will be set aside over the next three years to build up the government’s cyber and data security capabilities.
As such, this could translate into potentially large government project wins for CSE.
| Drawing comfort from 2014-2016 oil crash experience |
As of the current situation, we believe that the short-term volatility in oil price should not have a large impact on CSE’s O&G business based on the nature of its business (automatic renewals and high startup costs for its customers).
To provide a point of reference, in 2014-2016, when the WTI plunged from over US$100/bbl to below US$30/bbl, CSE’s new order intake for its O&G flow business declined 7.2% yo-y in FY2016.
However, we believe that the present situation is comparatively more optimistic for two reasons:
| 1. WTI prices declined more drastically then (-c.70%) as compared to now (c.50%), and 2. The average breakeven price for oil producers in the US has fallen from c.US$60/bbl to c.US$40/bbl. |
Furthermore, back in 2016, flow business accounted for less than 50% of total revenue but now, it accounts for c.90%. This should provide an even bigger buffer.
Full report here.
