• Declining new orders
• Muted outlook
• Strong net cash of S$73.3m

Oil & gas segment dragged earnings again

CSE Global Limited’s (CSE) 3Q16 core PATMI declined 44.1% YoY to S$4.8m on the back of a 21.6% plunge in revenue to S$81.0m due to lower contributions across all geographic regions, particularly in the oil & gas (O&G) industry on lack of large greenfield projects. 3Q16 gross margins improved 0.2ppt YoY to 29.1% due to better margins achieved from increased sales of higher margin infrastructure projects.

For 9M16, PATMI from continuing operations fell 35.0% YoY to S$15.0m, and only formed 66.7% of our FY16 forecast. New orders received in 9M16 and outstanding orders as at end-9M16 fell 18.3% and 19.4% YoY to S$229.0m and S$179.0m, respectively.

CSE also recorded strong operating cash inflow of S$14.9m in 3Q16 on higher billings and collections, which resulted in a strong net cash position of S$73.3m (including quoted investments).

Soft outlook to persist on volatile oil prices

Looking ahead, we expect orders from CSE’s O&G customers to continue to taper, and believe the growth in higher margin infrastructure projects (19%/32% of 9M16 revenue/EBIT) ahead will unlikely be able to offset the O&G segment decline. In addition, we do not expect the number of greenfield projects to recover until oil prices have stabilized. Hence, we believe the slowdown in spending within the O&G industry will persist until oil majors see reasonable stability in oil prices, impacting CSE’s new orders outlook. That said, we are comforted by CSE’s strong net cash position and its ability to generate strong positive operating cash flow.

Maintain HOLD with lower S$0.40 FV

On missed 9M16 and persistent slowdown in spending within O&G industry, we cut our FY16/17 PATMI forecast by 7.3%/14.2%, respectively. As we roll-forward to 9x FY17 PER, our FV decreases from S$0.43 to S$0.40. Maintain HOLD, supported by FY16F dividend yield of 6.7%, as we expect CSE to keep its dividend at 2.75 S-cents in FY16, given its strong balance sheet.

Source: OCBC Research - 10 Nov 2016