Mainboard-listed CSE Global is a global technologies company that offers cost-effective, total integrated solutions to various sectors such as oil and gas (O&G), infrastructure as well as mining and mineral in US, Asia Pacific, Europe, Middle East and Africa.
Since 2014, the global O&G industry downturn and the end of mining boom in Australia had affected CSE Global’s business and the share price has slumped by approximately 40 percent. With the current steady rise of crude oil price, is the beaten-down share price an opportune entry point for investors?
1H18 revenue jumped 15.1 percent to $184.3 million mainly attributed to higher revenue achieved in the US from time and material revenues as well as higher recognition of large greenfield (new installations) projects revenue.
In line with higher revenue, gross profit rose 13.4 percent to $49.5 million. Owing to the absence of large project revenue in Australia as well as lack of O&G projects in Europe, Middle East and Africa, gross margin fell from 27.3 percent to 26.9 percent.
In the meantime, operating expenses increased 5.7 percent to $38.2 million due to higher personnel costs. In the absence of an exceptional provision of $16.8 million arising from apparent violations of Iran sanctions by subsidiary CSE TransTel, CSE Global returned to the black with a net profit of $10 million. Excluding the one-off loss, net profit would have improved greatly by 67 percent or $4 million.
Oil Price Recovery
In 2Q18, CSE Global secured new orders totalling of $89.1 million primarily from small greenfield and brownfield projects in O&G sector and infrastructure sector. This helps to keep the order backlog stable at $148.8 million (1Q18: $148.6 million). Yet, CSE Global continues to see a lull in large greenfield O&G project wins.
As the O&G sector contributed 70 percent of revenue in 1H18 and 67.9 percent of its new order wins in 2Q18, CSE Global is a solid proxy to oil price recovery. Not only that, CSE has a strong presence in North America, with its businesses in the US contributing 65.4 percent of the group’s total revenue in 1H18.
As market fundamentals in the shale-oil production space continues to evolve favourably for CSE Global’s O&G business, we believe there is greater scope for new order wins. As compared to the large orders win, the small-orders wins especially from the O&G segment are highly recurring in the nature and generate higher net margin. In turn, this could further help the group to maintain profitability.
Synergies From New Shareholders
A Malaysian-listed energy service company, Serba Dinamik (Serba) has acquired 24.84 percent of CSE Global for $57.7 million in April 2018. The potential collaboration will open up new markets for CSE Global in the downstream O&G industry to win power and utility contracts from the Middle East and Malaysia. In turn, this would help to replenish the order book of CSE Global. The impact of the synergies possibly would start to flow in the next 12 to 18 months in the form of joint venture or possible outsourcing of work from Serba.
Nonetheless, we like CSE Global’s comfortable balance sheet in particular. As at 30 June 2018, CSE Global held $52.6 million of cash and bank balances but only has $33.2 million of borrowings. With $19.4 million of cash in hand, it could provide comfort if order flow is delayed. Furthermore, the debt-to-equity also stood healthy at 0.19 times.
Over the last four years, CSE Global has been consistently rewarding shareholders with $0.0275 of dividends per share every year without fail since FY14. Meanwhile, management had paid an interim dividend of $0.0125 per share for 1H18 and intends to maintain the full year dividend of $0.0275 for FY18. With the group’s share price of $0.435 as at 29 October 2018, this translates to a commendable yield of 6.3 percent. The strong operating cash flow of $22.6 million due to higher collections from trade receivables further documented their dividend support.
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* based on closing price on 26 Oct 2018
** based on closing price on 26 Oct 2017
Presently, the stock is trading at a price-to-book (P/B) ratio of 1.3 times, which is higher than 0.8 times a year ago. The group’s dividend yield is less attractive as compared to a year ago. This can be considered as relatively overvalued to some and investors may decide to sit out on this. Hence, investors should wait for prospects to improve before buying into the stock.