Excerpts from RHB report
Analysts: Lee Cai Ling & Jarick Seet
|• Maintain BUY, unchanged P/E-based TP of SGD0.54, 17% upside with 6% FY20F yield. Temasek is now CSE Global’s substantial shareholder, owning 25.03% after acquiring the stake from Serba Dinamik (SDH MK, BUY, TP: MYR2.55) at SGD0.45 per share last week.
• Overhang has been removed. Serba Dinamik’s investment in the company in 2018 led to investor concerns over CSE’s direction ahead.
However, expectations of a collaboration between the two companies were not realised.
|"We deem this news as positive for the medium term, premised on Temasik’s solid credentials as well as what the Singaporean Government’s investment arm can offer – CSE may be able to tap on the former’s network, which may also facilitate M&A deals."
-- RHB report
Through the married deal with Serba Dinamik (completed on 7 Jul), Temasek subsidiary Heliconia Capital Management has emerged as the new substantial shareholder.
• Oil prices are stabilising, but… On 7 Jul, the US Energy Information Administration (EIA) lifted its outlook for crude oil prices by USD4.00/bbl for 2H20F, and by USD2.00/bbl for 2021F.
This is based on expectations of growing demand – after COVID-19-related lockdowns are lifted – as well as OPEC+ production cuts.
If oil prices stabilise, the flow of recurring business should be more stable in 2H20.
In our 8 Apr report titled CSE Global: Temporary Disruption; Still BUY, we wrote that the pandemic may be subdued in 2H20.
However, the situation is still very fluid. At present, daily new COVID-19 cases remain high, potential second and third waves of infection are surfacing, and some places are heading for or have already implemented a second lockdown.
If the situation persists, demand for oil will remain low as road and air traffic will still be depressed, until a vaccine is found. The oil & gas segment accounts for 57% of CSE’s 1Q20 orderbook.
• Some impact in 2Q20. CSE expects 2Q20 numbers to be impacted, due to lockdown measures and low oil prices.
We expect to see a decline in revenue recognition on slower project execution, a slower flow of orders, and margin pressure as customers turn cautious about their budgets.
The situation may be prolonged, as the current environment remains undesirable.
• Growth strategy intact. Despite the pandemic, CSE’s acquisition strategy remains intact – and such exercises may be carried out at a slower pace.
We are likely to see acquisitions in the oil & gas or infrastructure space in either the US, Europe, or Australia/New Zealand.
With a positive cash flow and a net gearing of only 0.18x, we do not see any issue regarding funding for growth.
Moreover, CSE now has Temasek as a substantial shareholder, which may support the group’s future funding needs for acquisitions.
|• BUY on cheap valuation. We expect QoQ earnings growth in 2Q20 to be somewhat tepid.
With its robust orderbook of SGD302.7m and the earnings-accretive acquisitions CSE made last year, we continue to believe its FY20F dividend will be sustainable – and maintain our projections.
Our TP of SGD0.54 implies 10.5x FY21F P/E.
Full report here.