SINGAPORE (July 17): With Heliconia Capital Management, a unit of Temasek Holdings now a substantial shareholder of CSE Global, the engineering services company is now deemed to be more stable and therefore another reason for analysts such as RHB's Lee Cai Ling and Jarrick Seet to remain positive on the stock.

Heliconia on July 7 acquired a 25.03% stake in CSE Global at 45 cents from Malaysian energy service group Serba Dinamik via a married deal.

In a July 17 note, the RHB analysts maintain their "buy" call and target price of 54 cents. 

“Serba Dinamik’s investment in the company in 2018 led to investor concerns over CSE’s direction ahead. However, expectations of a collaboration between the two companies were not realised,” say both analysts in a broker’s report today. 

Incidentally, CSE Global is in a way, back to Temasek’s fold. It was part of ST Engineering, another Temasek-linked company, before a management buy-out back in 1997, followed by its own listing two years later. 

Temasek’s solid credentials and large holdings as the investment arm of the Singapore government, say Lee and Seet, could allow CSE to find synergies with the sovereign wealth fund’s broad networks and potentially facilitate M&A deals. 

Now, in the short term, stabilising oil prices could prove good news for CSE Global, with the US Energy Information Administration (EIA) upgrading its crude price oil outlook by US$4/barrel ($5.57) for 2H20 and US$2/barrell for 2021. 

Yet, such optimistic predictions are based on the assumption of post-lockdown recovery and OPEC production cuts, which would see the flow of recurring business stabilise in 2H20. 

With the situation remaining fluid with continually high Covid-19 case numbers, a potential second or even third wave of Covid-19 could see renewed lockdown measures that will keep oil prices depressed until a vaccine is found. 

Consequently, CSE Global expects 2Q20 numbers to be impacted by lockdown measures and low oil prices, with the oil & gas segment constituting 57% of its order book. Lee and Seet are anticipating a decline in revenue recognition and a slower flow of orders as well as margin pressure as customers become more conservative in their spending in the face of greater uncertainty. 

Should the current environment remain unfavourable, the analysts see this present state of affairs persisting for a prolonged period of time., with q-o-q earnings growth in 2Q2020 likely to be “somewhat tepid”.  

Still, CSE Global’s rekindled relationship with Temasek and strong fundamentals should allow its growth strategy to remain intact. “Despite the pandemic, CSE’s acquisition strategy remains intact – and such exercises may be carried out at a slower pace. We are likely to see acquisitions in the oil & gas or infrastructure space in either the US, Europe, or Australia/New Zealand,” say Lee and Seet. 

The firm’s positive cash flow and low gearing ratio of just 0.18 in addition to potential funding from Temasek will give it the necessary funds for expansion. 

Lee and Seet therefore recommend that investors move to buy CSE Global on the cheap. “With its robust orderbook of SGD302.7m and the earnings-accretive acquisitions CSE made last year, we continue to believe its FY20 dividend will be sustainable – and maintain our projections,” they report. 

They estimate that dividend yield is likely to remain at around 6% until 2022 while price-to-earning (P/E) ratio is expected to fall to 8.92 in 2021 and 7.99 in 2022. Return on average equity will rise from 21.7% to 13.7% in 2021 and 14.2% in 2022.

As of 3.30pm, CSE Global is trading at $0.46 and a P/E ratio of 9.88. Dividend yield currently stands at 5.91%.