CSE Global – record results underpinned by buoyant orderbooks (1 Sep 2010)

CSE Global (“CSE”) is a leading systems integrator with an international presence spanning Americas, Asia Pacific, Europe, Africa and the Middle East. It specializes in delivering process control systems; turnkey telecommunication network solutions; integrated Clinical Information System and intelligent transport solutions. It has a diversified portfolio of blue chip clients in the energy, chemical/petrochemical, utilities, financial and public sectors like transport authorities, amongst others
CSE derived the bulk of its revenue from the oil and gas industry. In fact, 66% of its 2QFY10 revenue (amounting to S$73.0m) was derived from the oil and gas sector. The next largest sector was the infrastructure sector which contributed 21% (i.e. S$23.4m) of its 2QFY10 revenue.
Investment Merits

Record order books
CSE’s FY10 results should benefit from the S$524m of new orders won in FY09. In addition, as at end June, CSE has won S$268m of new orders and is sitting on order books of S$427m which is up 29% year on year. The impact from the increase in order books has already flowed down to CSE’s top and bottomline. In 2QFY10, it reported a record net profit after tax of S$15.0m. In 1HFY10, it reported a 31% increase in net profit after tax to S$26.3m, on the back of 11% increase in revenue to S$211.1m.

Optimistic on multiple fronts
Being a system integrator which has exposure in a myriad of industries, CSE is securing contracts on multiple fronts. Firstly, CSE is seeing a strong recovery in the oil & gas business underpinned by gas development projects in UAE as well as LNG projects in Australia.

Secondly, CSE’s healthcare business also continues to perform well with the existing orders on hand; and will continue to work on other opportunities for the healthcare business in UK. This will be done via two ways. It is targeting the northern UK to expand its proprietary Rio system (CSE currently provides its Rio system to BT for 66 mental health and community trusts in the London and Southern clusters). According to CIMB Research, contracts in the northern UK may be announced in 4QFY10. In addition, CSE has developed two proprietary systems (Oceano and Pics) to target the UK acute healthcare sector .

Strong management capability
CSE management has displayed excellent management skills. From the small electronics arm of Singapore Technologies, established in 1985, it has grown strength to strength on the back of both organic and inorganic growth. Currently, it is operating in 32 offices in 20 countries. What is most impressive of CSE is its ability to acquire companies of synergistic abilities and integrate them into its existing business model. For example, CSE acquired New Jersey-based Hankin Acquisition Corp to increase its reach in hearth furnace and thermal processing, which are typically used in the mining and municipal sectors in 2008. It also acquired W.Arthur Fisher (New Zealand) whose business is in the manufacturing of process control and automation equipment. The acquisitions have typically augmented CSE’s customer base and are earnings accretive.
A potential target for M&A
According to Bloomberg, CSE offers the highest ROE of 36%, forward dividend yield of 4% while trading at a huge discount against its peers. Coupled with CSE’s presence and track record in system integration work for oil majors like Shell, ExxonMobil, and Conoco-Philips, CSE is a potential takeover target.

Investment Risks

Foreign currency risk
CSE’s diversified business exposes itself to a wide range of currencies fluctuations. According to DBSvickers’ estimates, the adverse impact of 10% depreciation in the foreign currencies would have a maximum of 5% impact on its bottomline.

Downturn in the oil & gas sector
Any downturn in the oil and gas sector is likely to have an adverse impact on CSE as CSE’s revenue is largely focused on the oil and gas industry sector.

Personal Opinion – Fundamentally sound company with good growth & earnings visibility

CSE offers a good growth story with earnings visibility, coupled with a respectable dividend yield, as well as astute management. Against Bloomberg’s analyst consensus target price of around S$1.39, CSE offers a total upside potential of 50% with a year’s horizon.

Ernest Lim, CFA, CPA
*This writeup is an abridged version of the original writeup which was sent to clients on 1 Sep.
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