• Strong exposure to Gulf of Mexico
• Higher quality projects in order book
• Forecast 18.7% core PATMI growth in FY14

Focusing largely on the oil and gas sector

Following the successful divestment of CSE Global’s entire shareholding interest in Servelec Group in Dec last year, we believe management will focus on driving its growth largely from the oil and gas sector. This sector contributed 75% of CSE’s total revenue from continuing operations in FY13.

Oil and gas related activities remain at healthy levels in most regions, in our view. CSE has significant exposure to the Gulf of Mexico (both the U.S. and Mexico side), and we expect the group to benefit from the ongoing recovery following the ill-fated Macondo oil spill incident and the imminent liberalisation of the Mexican oil and gas market.

There is also positive sentiment within the subsea sector. Market watcher Infield Systems has forecasted subsea capex to grow at a robust 15% CAGR from US$19b in 2013 to US$33.3b in 2017. CSE provides control systems for its subsea customers. Its order book stood at S$227.2m (as at 31 Dec 2013), a decline of 18.4% as compared to end FY12. However, management highlighted that this consists of higher quality projects and hence could augur well for its FY14 gross margins.

No further provisions for project cost overruns expected

CSE’s FY13 bottomline took a hit as it made provisions for project cost overruns amounting to S$8.1m. Looking ahead, management is hopeful that it will not have to make further provisions for this MiddleEastern project in 2014, as it has provided some buffer in terms of assumed project completion timeline when making its provisions.

Maintain BUY

We re-work our assumptions following a change in analyst coverage, and now forecast CSE to register core PATMI growth of 18.7% and 9.3% in FY14 and FY15, respectively. We are expecting a backend-loaded FY14 due to the timing of certain key projects and expectations of new order wins in 2H14. Applying a 9x target PER peg to our FY14 EPS forecast, we derive a fair value estimate of S$0.63 (previously S$0.96 before the Servelec Group divestment). Maintain BUY.

Source: OCBC Research - 28 Mar 2014