Despite a difficult year for oil and gas where prices cratered into negative territory, CSE Global has outperformed analyst expectations as it recorded a net profit of $28 million in FY2020 ended December. This is 14% more than DBS’s estimates of $24.5 million. 

“CSE’s Infrastructure and Mining & Mineral segments acted as the strong pillar of support amidst the challenging environment in its Oil & Gas segments in FY2020. New order book continued to grow by 22% each in both segments in FY20,” writes the DBS team in a market insight piece for the research house on Feb 25. 12MFY2020 Oil & Gas segment orders declined in FY2020 due to the high base effect of greenfield projects in FY2019. 

With Infrastructure and Mining & Minerals increasing in profitability as some projects move to the more profitable commissioning and finalising stages vis-a-vis the procurement stage, FY2020 EBIT margin exceeded DBS’s 7.1% estimate by 0.7 percentage points (ppt) at 7.8%. In particular, Infrastructure EBIT rose 2.5 percentage points y-o-y to 13.7% in FY2020 from 11% in FY2019. 

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Says the DBS team, “Looking ahead, we think these two segments will continue to offer resilience and grow steadily as governments (in Singapore and Australia) spend more on infrastructure projects to stimulate the economy, and as commodity prices continue to trend higher, leading to more Mining & Mineral projects in Australia.”

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2HFY2020 revenues fell 6.4% y-o-y to $162.1 million despite overall growth by 11.3% y-o-y to $502.8 million due to weakness in Oil & Gas markets and lower recognition of Infrastructure projects. Still, the whole-year revenue increase was due to full-year contributions from Volta and its two large Oil & Gas contracts won in 4QFY2019. But FY2020 order book was down 23% y-o-y to $236 million from $307.4 million in end-2019. 

But Oil and Gas exceeded expectations in FY2020, with new orderbook exceeding DBS’s estimate of $407.2 million by 6% at $431.5 million. CGS-CIMB analyst Cezzane See in fact highlights strong 4QFY2020 performance as partly responsible for driving FY2020 revenue up 11.3% y-o-y to $502.8 million alongside strong infrastructure segment revenues. 

“While its Oil & Gas new order book declined 53.8% y-o-y and 21.3% h-o-h, we believe the worst is over for this segment,” notes the DBS team. WTI oil prices are currently at US$60/barrell ($79.04) - 50% above the US$40/barrel range in 2HFY2020. They also predict US independent oil extraction and processing firms raising capex in FY2021, meaning more projects for CSE. 

The DBS analysts are confident that Oil & Gas has bottomed in 3QFY2020. Sequential pick-up in its new order book was 30.1% q-o-q, improving their conviction of a “bottoming out” scenario. 

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“CSE guided that the current market environment still presents numerous uncertainties but its remains confident it will achieve a satisfactory financial performance in FY2021 We believe FY2021 revenue will shrink yoy due to the lower end-Dec 20 order book, but as we have higher GPM assumptions, we bump up our FY2021 EPS forecast a tad,” remarks See of CGS-CIMB. She predicts a 4.3% EPS in FY2022 and 3.3% y-o-y in FY2023. 

The CGS-CIMB analyst likes CSE’s continued diversification into infrastructure and metals & minerals. She sees this potentially opening the way for further margin expansion while acting as an earnings cushion till the likely scenario of Oil & Gas recovery if rising prices do not burn out. With dividend yield coming in at about 5.6% or 1.5 cents, the counter’s projected P/E of 9.85 in end-2021 represents good value for money. 

“Potential re-rating catalysts are swifter project execution and higher-than expected order wins. Downside risks are lower order wins and potential cuts in DPS,” writes See in a Feb 24 broker’s report. 

As of 4.15pm, CSE Global is trading 3.06% up at $0.50. Dividend yield is 5.45% and P/E 9.01 times.