• 2Q14 core PATMI -6.0% YoY
• Secured S$95.4m of new orders
• Management still optimistic on outlook

2Q14 core earnings below expectations

CSE Global Limited reported a 6.0% YoY decline in its PATMI from continuing operations to S$8.0m despite a 16.3% jump in revenue to S$108.1m. The former fell short of our expectations, largely due to a higher-than-expected effective tax rate (PBT grew 11.9% YoY to S$12.0m). Management attributed this to a one-off deferred tax expense recognised in the U.S. and stronger contribution from higher tax jurisdictions like the U.S. and Australia. For 1H14, revenue grew 6.2% to S$201.3m, while PATMI from continuing operations fell 9.1% to S$15.6m. This constituted 50.0% and 43.2% of our FY14 forecasts, respectively. An interim DPS of 1.25 S cents was declared (ex-dividend on 15 Aug 2014 and payable on 27 Aug). This was a slight decline from the 1.5 S cents declared in 2Q13.

Order book on downtrend

CSE also registered a 9.3% YoY decrease in its new orders received to S$95.4m, while outstanding orders were S$194.7m (-28.6% YoY), as at end 2Q14. Sequentially, while new orders secured rose 29.9%, its order backlog slipped 6.1%. Nevertheless, we note that CSE has a steady stream of brownfield projects which are not typically captured in its quarterly order book figure, given the fast turnaround time between securing the orders and work completion. Management maintained optimistic on its prospects, and reiterated its target of growing its core PAT by 10-15% organically in FY14.

Downgrade to HOLD

Although we expect 2H14 to be stronger sequentially for CSE, we see the need to lower our FY14 and FY15 core PATMI forecasts by 4.9% and 1.0%, respectively. CSE’s share price has performed strongly since we last reiterated our ‘Buy’ recommendation on 14 May this year, appreciating 16.9% as compared to the STI’s 2.5% gain during the same period. While we like CSE for its healthy balance sheet and FY14F dividend yield of 4.0%, we believe its share price has now run ahead of its fundamentals. Hence, we downgrade CSE to HOLD, with a revised fair value estimate of S$0.64 (previously S$0.63), as we roll forward our valuations to 9x blended FY14/15F core EPS.

Source: OCBC Research - 13 Aug 2014