CSE Global

[freedom]

as said in the annual report 2011 (pg 49), ASTIB only contributes $23 million revenue and $2,583,000 profit after tax, which is far short from any of the conditions for issuing new shares. with 2.6 million profit, the PE paid by CSE Global was around 18 times.

[starbugs]

Any views on Q1 results? The sell-down yesterday was quite strong (looks like Amundi is still at it)

[egghead]

IMHO, to achieve a PAT of $12.6m in 1Q2012 while the loss making projects are still being worked off is commendable. Noted that ASTIB is finally contributing meaningfully at EBIT of $2.1m. I'll watch the order book as 1Q2012 order is less than the $100m mark. Given management guidance that 2H2012 will be stronger (after working off the loss making projects), there is something to look forward to.

[freedom]

a few points:

1. margin was dropping partly because of low margin US on-shore greenfield project

2. low new order received and declining total order book

3. high receivables, but the management mentioned all still within credit term.

[Some-one]

Any views on Q1 results? The sell-down yesterday was quite strong (looks like Amundi is still at it)

Other than what feedom has written, CSE Global also made a loss due to project cost overrun in Middle East but according to the financial statements last year, they have sacked the person in charge. Management is confident that their results for FY12 would surpass that of FY11. I have attended their AGM and from my own judgement, the management is pretty serious about turning around for FY12.

Using 10 years of data, it appears to me that the current drop is due to a drop in ROE for FY11 but considering that their ROE is pretty consistent (above 20%) for the last 10 years, other than FY11, I would see the current drop as good time to accumulate more.

(vested)

[dzwm87]

I think, overall, the results are pretty decent but not a shocker of good or bad. As a better comparison, I will compare its P&L performance against 2010 earnings. If CSE can perform better than 2010, I believe it will be a very huge catalyst to propel it back to 90+c level.

My views from the 1Q FY12 results:

1. Dropping margins due to larger proportion of greenfield (new) projects. Not a very critical issue as despite the drop in GPM & NPM, revenue and earnings surpassed both 1Q FY11 & 1Q FY10 figures

2. Instead, low new order received is a growing concerns. I am not sure what's the reason but I reckon it is due to poorer prospect for the non-O&G segment. O&G still records a significant growth and that is very promising.

3. High receivables - but not a concern to me. Mgmt stated there is no incident of bad credit. Moreover, the $30m increase coincides with a $30m drop in projects-in-progress. Though I can't say for sure with 100% accuracy, I reckon a large proportion accounts for this reason.

4. Bank loans still remain high but mgmt had stated during the post-AGM discussion that it will simply be re-financed. Looking at CSE's cash holding and the amount of orders, I doubt banks will worry and not allow re-financing. Probably, the bank loans will decrease by 3Q or so.

5. FCF remain higher as compared to 1Q FY11 & 1Q FY10, but CAPEX still seem high at S$2.5m. Mgmt stated that the CAPEX is mainly in Australia and I suspect it is probably a continuation of its radio set purchase for CSE Comsource. I have yet to dug out a better understanding of this CAPEX investment as I am unable to speak with the mgmt - due to its blackout period.

6. Segment performance seemed to be highly inclined towards O&G & America region. This is further confirmed by the increase of hiring in its American offices. It has almost doubled since 2Q FY11! So, growth from America onshore O&G still seem strong and it can probably meant more contract wins for the future.

7. Lastly, if you have analysed past quarters performance, its earnings does not have a very significant seasonality effect. In short, earnings tend to be slightly smoothed across each half of the financial year. If based on 1Q FY12 EPS of 2.4c, we can estimate a full year EPS of 9.6c. Based on this, ROIC stands at 16.2%. At closed price of 71.5c, this also means a forward P/E of 7.45x - well below its -1 SD of 7.62x & avg P/E of 13x. What's attractive is its P/B is at 1.76x almost 50% to its avg P/B of 3.5x. Bear in mind, this isn't an indication of CSE's intrinsic value, but at least, its trading price is very cheap and attractive now.

As Some-one had mentioned, CSE has a 10-year track record. Its mgmt team is very capable. Though Tan Mok Koon is on sabbatical, its Group CEO does seem to be doing fine now - the team seem quite well-gel together during its last AGM. I still remain confident of CSE's prospect and believe they can recover well this year. it is only a matter of time though and a matter of any unforeseen 'black swan' screw-up events. The biggest catalyst, for now, will be 3Q results because it wil reveal the extent of CSE mgmt's confidence since they mentioned 2H FY12 will be the major turning point.

The highest probable risk, for now, is only macro events putting pressures on CSE's stock price. If something big and adverse happened in Euro, it might probably bring it down to 60+ cents.

*vested*

[D123]

3. High receivables - but not a concern to me. Mgmt stated there is no incident of bad credit. Moreover, the $30m increase coincides with a $30m drop in projects-in-progress. Though I can't say for sure with 100% accuracy, I reckon a large proportion accounts for this reason.

7. Lastly, if you have analysed past quarters performance, its earnings does not have a very significant seasonality effect. In short, earnings tend to be slightly smoothed across each half of the financial year. If based on 1Q FY12 EPS of 2.4c, we can estimate a full year EPS of 9.6c. Based on this, ROIC stands at 16.2%. At closed price of 71.5c, this also means a forward P/E of 7.45x - well below its -1 SD of 7.62x & avg P/E of 13x. What's attractive is its P/B is at 1.76x almost 50% to its avg P/B of 3.5x. Bear in mind, this isn't an indication of CSE's intrinsic value, but at least, its trading price is very cheap and attractive now.

Historically, CSE Global has never been able to collect as much cash as it has reported net profits. I'm guessing reported net profits overstate owners' earnings due to additional working capital requirements as volume of sales increases. In their case, the additional working capital required over the years have been significantly large; in my calculations, cumulative owners' earnings post-2007, as calculated by taking CFO minus capex, has only been half of reported earnings. In that case, isn't it too optimistic to value the company based on a multiple of the reported net profits?

[freedom]

too many acquisitions for CSE all these years. evidently, it enlarges the requirement for working capital, especially when ASTIB acquisition did not deliver what it promised in 2011.

It remains to be seen whether the integration will be smooth forward. Not sure whether the new CEO can take the challenge or not. previous management has strong engineering background.

[dzwm87]

Historically, CSE Global has never been able to collect as much cash as it has reported net profits. I'm guessing reported net profits overstate owners' earnings due to additional working capital requirements as volume of sales increases. In their case, the additional working capital required over the years have been significantly large; in my calculations, cumulative owners' earnings post-2007, as calculated by taking CFO minus capex, has only been half of reported earnings. In that case, isn't it too optimistic to value the company based on a multiple of the reported net profits?

I assume when you mentioned "owners' earnings", you are referring to FCF? CSE's FCF yield on PAT is averaging around 29% for the past 10 years - quite remarkable I will say. 1Q FY2012 yields 45% of FCF on its PAT but I won't want to make anything committed analysis on that. For any company, FCF can be very volatile but at least for this quarter, CSE has performed better than 1Q FY11 or FY10 results.

My concern lies mainly on the slightly heavy CAPEX & the rationale behind it. Group CEO Alan Stubb mentioned a majority of the CAPEX was meant for radio set purchases under its Australian CSE Comsource biz unit. I suspect the CAPEX is non-recurring but I didn't really catch what the reason for the purchases was. CSE is a human capital-intensive company and it is rarely they will need to embark on too much of CAPEX expenses.

You are right by saying that it is too optimistic to value a company based on a multiple of earnings given that CSE mainly derive lumpy earnings from their project contracts. Thus, a P/E valuation needs to be supported by a strong outstanding order book. At S$398.3m outstanding order book, it should provide enough support for them to recover from its FY2011 setback. The margin of safety is also provided by the cheap valuation currently. But of course, not all things are rosy. Another concern will be the low 1Q FY12 new order win of S$85.9m. I am not sure what's the reason for it but my unsupported gut feeling is that strong order wins should come for subsequent quarters.

[egghead]

The CAPEX was for Australia mining business in the purchasing of radio communication equipment which is needed for their project. I remember he mentioned that instead of renting these equipment, CSE chose to buy. IIRC, the payback is about 3 years for these equipment.