CSE Global

[dzwm87]

Most likely they are raising capitals but I thought it will be a one-off event.. surprised to see the buying and selling recurring

[Nick]

Managing Director added 54 lots at 80.5 cents today.

http://info.sgx.com/webcorannc.nsf/Annou...endocument

(Not Vested)

[dzwm87]

Not really significant.

Put it into perspective, it's only around 1 month of MD's annual salary - based on FY11 reported remuneration.

Amundi bought back their stake again.. nobody cares about that anymore?

[Some-one]

Seriously, what is Amundi trying to do? First they sold 181 lot, then they bought back 105 lot. Why don't they just keep it instead of selling and buying back? Are they trying to manipulate the counter?

[dzwm87]

Seriously, what is Amundi trying to do? First they sold 181 lot, then they bought back 105 lot. Why don't they just keep it instead of selling and buying back? Are they trying to manipulate the counter?

Unlikely, if they want to manipulate, they should simply sell to around 4% stake, play with the 1% gap and not face the requirement of disclosing their transactions.

IMO, this is a classic case of huge fund's restriction when it comes to investing in small to mid caps - transfer of funds can cause huge move in share price.

[Thriftville]

Hey dzwm87, hope to hear your views on CSE on the latest result. Thanks in advance!

[dzwm87]

Some opinions on CSE 2Q12 results

Margins concern
CSE's recovery went on scheduled. Like I had said earlier, 2011 will be a poor comparison. One should use 2010 result to see if the company has truly improved. On 2Q12 v 2Q10 basis, CSE's performance is rather stagnant if we adjust out the S$10m one-off gain in the sale of eBworx's stake. On a 1H12 v 1H10 basis, CSE has improved slightly. My concern will be its falling margins. On a quarterly comparison since FY08, 2Q12 GPM is the second lowest - lowest was during 2Q11 project overrun issues. Given CSE's lumpy earnings nature, such a comparison might not be the best since there is technically a low rate of recurring income. So the question is if margins for CSE's projects have become lower. I don't have the answer to that yet but note that there was a recognition of a S$7.5m zero-margin ME project. But excluding the impact of this project (adjusting away S$7.5m from 2Q12 revenue) will yield only an additional 1.7% GPM. Not likely to be the game-changer. OCBC research report did suggest that onshore greenfield gas project typically yield a lower GPM than offshore and I suspect this is the case since CSE was pitching their earnings driver to be coming from onshore projects.

CCC days & balance sheet
Interestingly, CSE went into negative CCC days from my calculations. Not much but just a -1 CCC day. The result may varies depending on the calculation method but the key is to note that their CCC days had improved (FY11: 70days). Then again, given that it is just an interim result, I won't place too much optimism to this until we have seen the full FY12 results. It could be due to faster turnover in shorter contract periods. Note: lumpy earnings = less weight on historical performance
Balance sheet is also alot stronger with its debt refinancing.

Negative Op CF for 2Q
Not a significant feature but on a 1H consolidation, CAPEX (in terms of PP&E purchases) stands at S$4m - almost the amount of an entire year of CAPEX since 2005 except for 2011. No indication but I suspect they are simply continually with the radio set purchase for CSE Comsource.

Moving forward: good/bad?
I won't say it's a surprise shocker on either side but at least it is still well within my expectations. Except for the declining margins, PAT remains higher than 1H10 and that is at least a good sign moving forward. Some things that I like and explains why I am still holding onto this counter:

1. Growing exposure to O&G industry - at 72% of sales. I will expect this to continue and given that the industry is booming, this is a good indication. This is in contrast to its industry mix and also explains why CSE is often missed out by analysts (with respect to O&G downstream players)
2. Potentially more new orders - DBS mentioned CSE is bidding for a S$70m contract in Republic of Guinea & a couple of projects in Australia (S$40-100m) in the LNG sector. CIMB forecasts S$550m orders for FY12 (IMO, quite optimistic)
3. CSE is still working on its 0-margin projects in ME - this means that there is still some recovery play though the significance of it is uncertain

All in all, CSE should be doing fine for the 2H. Recovery phase is going on track. One thing I do not like is the lack of transparency. It's hard to get breakdown data on CSE business and the fact that it is a lumpy earnings business doesn't make it any better. However, a 10 year public listed performance track should provide a good inference.

Moving forward, my next main catalyst will be its FY12 full year results. And oh yes, we still get the occasional distortion in OMP&OMS from Amundi. By now, I believe the market has discounted their actions. IMO, a large asset management firm should never invest in such a mid-cap company. But if they do - especially the fact that they chose to buy back after selling - it does infer something about it right?

[Thriftville]

Thanks buddy for your time! Your analysis really helps me to have a better picture of the situation.

I've some questions on CSE. Hope to hear your opinions:
1. Does CSE has any unique technology? CSE on the whole looks like a pure system integrator. Is "experience" and cost their main selling point?
Trying to understand how CSE remain competitive.

2. CSE is relatively small compared to competitors like ABB, Yokogawa, etc. Thus, there is some room for growth. Do you think CSE could grow at a much faster rate?

3. Is CSE able to get a free ride on the success Keppel and Semb Marine?

4. Regarding the Middle east issue, I find it strange that CSE violate something that's clearly written on the contract, i.e. to procure from local suppliers. Seems to me they are desperate to improve margin by taking such big risk?

Thanks in advance!

[dzwm87]

1. By unique technology, I am assuming cutting edge patented technology. In that case, CSE does not have any of it. They simply perform integrated solution for their customers. For instance, safety control or real-time data monitoring.. wellhead control system which monitors the safety of wellhead valves for O&G drilling. They do have other systems such as RiO which manages real time data information for mental health hospitals in UK. Other system include Oceano which does something akin to data management as well. You can find out more in their annual reports.
What CSE does is to provide automated system solution which will value-add to their customers. Contrary to how they are calling themselves as a technology company, their expertise lies little on manufactured component but more on human capital. This is why they are able to generate free cash flow.

2. Yes, CSE competes with the bigger player like ABB or Honeywell. And you can really look at this from 2 different perspectives. ABB, Honeywell & other competitors do not engage in system solution as their core business. CSE, being small may be capable in targeting the smaller customers. I won't say CSE has no growth but how much, I am uncertain. My thesis was on CSE to recover back from its 2011 under-performance. Any growth above 2010 level will be bonus to me - though I won't think it will be an issue.

3. CSE is a downstream beneficiary of O&G boom. They target the American region but I am not sure if Keppel & Semb Marine are their customers (I suspect not)

4. According to them, they said they had missed out on the contract details and hence, did not know they had to procure from local suppliers in ME. How CSE works is they procure system parts in Singapore and they will assemble it in the customers' country.

As I had said, information transparency is scarce. So the only way is to determine management capability. I was confident CSE could recover from their 2011 2Q losses because they had been through worse in 2008 - when oil drops to US$40/bbl. It is illogical to think that the management will do anything to jeopardize the company's performance. The company had always reaped in above 20% ROE since 2000. FY11's ROE was only 14% and CSE was priced at 7x FY2010 earnings. On a normalized basis, CSE can be traded at a decent 15x P/E. It was a good opportunity for me and all that's needed is to have a long investment horizon to wait it out.

Of course, people were also doubtful given when Amundi kept selling down their stakes. Things got worse when they announced a slight profit warning for 4Q but facts show that earnings were simply delayed into the next quarter. The sell down from Amundi also caused prices to be depressed downwards since it was a little less liquid earlier this year.

Some interesting info: http://markets.ft.com/Research/Markets/T...?s=544:SES

FT tracks the insider movement for large shareholder and it includes those below 5% (not announced via SGX). It's encouraging to note that Templeton doubled its stake in 1H this year. Aberdeen added in a little for the past 3 months as well. There are some strong sellers too with UBS, JPM & DBS (Nikko) being some of them. Matthews is a long-term approach investment fund as well.

[Thriftville]

Thanks again dzwm87!

1. Without any cutting edge tech, I guess CSE got to be satisfied with a net margin of 10%.

2. I talked to a friend in this line, he mentioned that CSE is very accommodating to customer demands. They are willing to customize modules to suit the requirements. Bigger competitors are inflexible in this.

3. Keppel builds rig, they will need systems to run the platform. CSE could work well with them. Tried googling, but can't find any data on Keppel awarding contract to CSE. Could CSE's project in America region been awarded by Keppel? I think Keppel builds rig for Transocean at Gulf of Mexico. It will be a good bonus if CSE teams with Keppel. Just like SATS riding on SIA.

4. Yup, you're right that buying CSE is just to profit from the ME problem. I was just curious how they could blatantly breach a contractual term. haha