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Despite surge in new orders, DBS downgrades CSE Global on supply chain woes

UOB Kay Hian Research expects an “above-average” full-year dividend yield of 6.0%, compared to the STI’s 4.0%.

Despite new order wins, CSE Global is blighted by supply chain disruptions and a lack of large greenfield projects. As such, DBS Group Research analyst Ling Lee Keng is downgrading the systems integrator to “hold” from “buy”.

“We remain positive on CSE’s recovery as new order wins from all segments continued to recover. Order intake surged 100.3% to $421.7 million on robust growth across all three segments. However, supply chain constraints continue to persist, hence pressure on margin continues,” she writes.

In an Aug 16 note, Ling trimmed CSE’s target price to 45 cents from 59 cents previously.

CSE provides automation and telecom solutions to its customers in the oil, gas, mineral, mining and environmental sectors. The company has a presence across the Americas, Australia, Asia, Europe, the Middle East and Africa.

CSE’s 1HFY2022 revenue stood at $262.2 million, 11.8% higher y-o-y. This represents 55% of Ling’s full year forecasts. “The higher revenues can be ascribed to a 47.9% growth in infrastructure revenues in Australia and the Americas region. Revenue from the energy segment declined by 7.4% y-o-y due to lower contributions from large projects. The mining and minerals segment grew 18.4% y-o-y on the back of stable commodity prices and higher mining activities.”

That said, 1HFY2022 net profit declined by 55% y-o-y to $4.5 million due to supply chain disruptions, changes in the sales mix and higher operating expenses.

1HFY2022 net profit only amounted to 21% of Ling’s full-year forecasts. “Gross margins came in 2.1 percentage points lower at 27.8% owing to a change in sales mix with higher revenues from the lower-margin energy sector, and lower margins of new infrastructure projects,” she adds.

CSE also reported lower net margins of 1.7%, compared to 4.3% in 1HFY2021, which was negatively impacted mainly by higher operating expenses from the newly acquired subsidiaries (up $2.7 million), increased staffing costs (up $1.8 million), selling and distribution expenses (up $1.8 million), and upkeep of building and equipment cost (up $1.1 million).

Overall operating expenses increased by 13.7% y-o-y, which was higher than the 11.8% y-o-y increase in revenue, resulting in lower margins. Ling writes: “We should expect an improvement in margins when supply chain disruption eases.”

CSE has declared an interim dividend of 1.25 cents per share, unchanged from this time last year.

Absence of large greenfield projects

Generally, the energy sector is still highly disciplined with their capital expenditure, resulting in fewer large greenfield projects in 1HFY2022, says Ling. “This is likely to continue into 2H2022, which could dampen revenue contributions from the energy sector.”

CSE is confident of a better 2HFY2022 despite supply chain disruptions. “Supply chain issues have resulted in project delays and higher costs of executing projects, which has led to lower gross margins. Nonetheless, the robust orders point to a healthy pipeline and CSE is sanguine about the second half of the year,” writes Ling.

Strong order wins could mitigate the unfavourable impact from the supply chain disruptions, Ling adds. “The execution of recent contract wins is also likely to be backloaded in 2HFY2022 and FY2023, which could boost business performance going forward.”

On account of the strong order wins, Ling has raised FY2022/FY2023F revenues by 15% and 10% respectively, while reducing FY2022F/FY2023F earnings by 37% and 19%.

The lower target price is pegged to 16.8x on FY2022F earnings, up from 13.8x previously, on the back of a generally improving outlook.

'Attractive dividend yield'

Meanwhile, UOB Kay Hian Research analyst John Cheong is maintaining “hold” on CSE, with an unchanged target price of 44 cents.

On top of the supply chain concerns, Cheong expects the group to maintain its full-year dividend at 2.75 cents per share for FY2022, translating into an “above-average” dividend yield of 6.0%, compared to the Straits Times Index’s yield of around 4.0%

In an Aug 16 note, Cheong reduced his FY2022/2023/2024 earnings forecasts by 42%/10%/11% respectively, after reducing net margin estimates by 1.5ppt/1ppt/1.2ppt on account of higher admin costs due to supply chain disruptions.

He also raised his FY2022/2023/2024 revenue forecasts by 3%/22%/31% after factoring in higher order wins of 39%/13%/10% to $720 million/$612 million/$618 million.

Cheong’s target price of 44 cents is pegged to 13x FY2023 PE. “We have rolled over our valuation base year to 2023 from 2022, so our target price remains unchanged despite a reduction in our earnings estimate. Our target price implies a dividend yield of 6.3%.”

As at 9.50am, shares in CSE Global are trading 0.5 cents higher, or 1.06% up, at 47.5 cents.

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