CSE Global

OCBC on 29 Feb 2012

CSE Global’s FY11 revenue and net profit came in at S$457m (+2% YoY) and S$28m (-47%) respectively, and were in line with our forecast and consensus. Overall, 2011 was a difficult year as CSE faced cost overruns and project execution delays in its Middle East projects. It also suffered an operating cash deficit of S$6.9m due to increased working capital requirements. Considering the past issues, we think that investors should exercise caution. CSE needs to demonstrate that it is able to execute contracts well and manage its growth judiciously. Maintain HOLD with unchanged fair value estimate of S$0.80.

FY11 net profits of S$28m
CSE Global’s FY11 revenue and net profit came in at S$457m (+2% YoY) and S$28m (-47%) respectively, and were in line with our forecast and consensus. Recall that the group had previously warned that its 4Q11 revenue and profit contribution would be adversely affected as several customers were late in providing approvals for its engineering designs. 4Q11 revenue and net profit were S$141m (+9% YoY) and S$9.4m (-20% YoY), respectively. Overall, 2011 was a difficult year as CSE faced cost overruns and project execution delays. It has proposed a final dividend of 2 Scts.

Middle East difficulties
The group had recorded provision of S$22m for cost over-run in its Middle East projects in 2Q11. In 4Q11, it experienced delays from customers, which affected its financial results. We suspect 2012 may continue to be challenging. Externally, the Middle East region still faces headwinds from rising political tensions (Iran-Israel conflict and Arab Spring) and financing concerns (the pull-back of European banks). Internally, the group had recently replaced its MD for the telco business (after the cost overrun issue) and may need time to manage the leadership transition.

Operating cash deficit
The group suffered an operating cash deficit of S$6.9m for FY11 (FY10: +S$58m operating cashflow) due to increased working capital requirements for its telco business. Net gearing has also increased to 34.3% as at end-Dec 11 (end-Sep 11: 0%). We project an order intake of S$500m in FY12F, and lowered our FY12F revenue and net profit by 10-13%, in line with management’s guidance. Considering the past operational issues, we think that investors should exercise caution. CSE needs to demonstrate that it is able to execute contracts well and manage its growth judiciously. Thus, we are keeping our HOLD with unchanged fair value estimate of S$0.80. 

CSE Global

OCBC Research on 8 Feb 2012

Investor confidence in CSE Global may be shaken after recently issuing a profit warning for its 4Q11 earnings. We note that this is the second disappointment in FY11 – which we also view as a leadership transition year – and this could lead to a market de-rating on higher perceived risks. While we have adjusted our FY11 numbers, we have kept our FY12 estimates unchanged. However, we are lowering our valuation peg from 9x previously to 7.5x, resulting in a lower fair value of S$0.80 (versus S$1.06). We also downgrade our call to HOLD.

4Q11 profit warning. 

CSE Global warned that its 4Q2011’s profit after tax will be around 75% of what is achieved during 3Q2011. This is in contrast to its earlier guidance (on Nov 2011 Results Announcement) which stated that 4Q2011 performance “will be better than 3Q2011 and 4Q2010”. The group explained that several of its customers were late in providing approval to their engineering designs during the quarter, resulting in a lower-than-expected revenue and profit contribution from these contracts.

Investors’ confidence may be shaken. 
We note that this is the second negative disappointment in FY11. The first was in Aug 11, where it announced S$21.7m in provisions for cost overrun in four Telecommunication projects. In view of the two negative surprises happening within the same financial year, we think that investors’ confidence may be somewhat shaken by the group’s disappointing execution of its contracts.

Experienced former MD goes on sabbatical leave. 
In the meantime, the group announced that former Executive Deputy Chairman Mr. Tan Mok Koon will be taking a one-year sabbatical leave and will be re-designated as Non-Executive Chairman. Mr. Tan had led the group from 1997 until 2011 when he passed on his responsibilities as Group MD to Mr. Alan Stubb. Mr. Tan was then re-appointed as Executive Deputy Chairman.

Downgrade to HOLD with fair value estimate of S$0.80. 
On the points mentioned above, it appears that the leadership transition may have not been as smooth as envisioned. The learning curve is understandably steep, especially when the group has operations in over 20 countries. While we have adjusted our FY11 numbers, we have kept our FY12 estimates unchanged. However, we are lowering our valuation peg from 9x previously to 7.5x, resulting in a lower fair value of S$0.80 (versus S$1.06). We also downgrade our call to HOLD.