KGI Research Singapore

Singapore's leading broker offering Futures, FX, Equities and Wealth Management.

CSE Global (CSE SP)

Updated 17 March 2021

CSE Global - Technological Excellence Through Innovation
Image: CSE Global
  • We upgrade CSE to Outperform (from Neutral) as we see the company accelerate its transformation into a key infrastructure player in Singapore and Australia.
  • The backing of Heliconia Capital Management (a unit of Temasek) as the largest shareholder should provide a favourable tailwind to new project wins.
  • In the near-term, the recovery of oil and gas projects and commodity upcycle should give CSE enough runway to support its above-industry 5% dividend yield.
  • Valuations are currently attractive at 10-9x forward P/E while EPS growth could surprise on the upside if/when it wins increasingly higher-margin infrastructure projects.

The three pillars

CSE’s strength lies in its diversified businesses. While originally oil & gas heavy, its pivot towards infrastructure in Australia and Singapore is starting to have accelerating benefits. In our view, the group’s capabilities as an asset-light system integrator in key growth/recovery industries places it in a sweet spot when global economic growth starts to pick up in the second half of 2021.

Commodities boom down under

The surge in the commodities sector, fuelled by supply-demand mismatch, and now boosted by the prospect of more fiscal stimulus (specifically to support green initiatives) in the US and elsewhere, has led to metal and agricultural prices trading at multi-year highs. The commodities upcycle is a boon to Australia where CSE generates more than half of its infrastructure revenues. In addition, the group’s radio communications service also serves the mining and minerals (M&M) sector in the country. EBIT trend in CSE’s M&M segment has improved from S$0.1mn in 1H2019 to S$2.3mn in 2H2020.

Oiled up for the ride

As CSE transitions into infrastructure/M&M projects, the Oil & Gas industry still makes up more than half of revenues in the last two years. It is worth nothing that in this segment, the group is well diversified between onshore and offshore projects in an almost equal split. Offshore project commitments are expected to reach a new record of almost 600 projects in the next five years, according to Rystad Energy, driven partly by better cost structure, and underinvestment over the last few years.

Infrastructure projects as the next catalyst

CSE has highlighted Singapore Infrastructure projects as a key strategy focus in 2021, in key sectors such as security and transportation-related projects. We expect major projects in this segment to be the key earnings catalyst for the group, as this would mean better diversification from the Oil & Gas sector. Having Heliconia Capital Management, a unit of Temasek Holdings, as the new major shareholder of CSE, strengthens the case for more infrastructure-related projects in Singapore.

Valuation & Action

We upgrade CSE to Outperform and raise our TP to S$0.61, based on 12x FY2021F P/E.

CSE is currently trading at 10/10/9x 2021/22/23F EPS, below its 10-year average of 12x P/E.

We see its strong balance sheet as a key differentiator among peers, giving it the ability to consistently pay out steady dividends to shareholders,  while also providing it the flexibility to scoop up EPS-accretive acquisitions in the current environment.

Risks

Margin pressure due to competition and lower-than-expected new order wins.  Foreign exchange risks due to its exposure to USD, AUD and EUR.

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