• Keep BUY with a new DCF-backed SGD0.69 Target Price from SGD0.61, 52% upside plus 6% yield.
• CSE GLOBAL (SGX:544) has acquired 100% of Volta – a custom-engineered electrical equipment centres solutions provider – for USD25.1m (SGD34.8m).
• Volta’s net PBT for FY18 was USD4.9m (SGD6.9m) Based on our estimation, this acquisition should add SGD7.8-8.4m and SGD4-4.5m to CSE Global’s EBIT and PATMI on an annualised basis. As such, we lift our FY20F-21F earnings 15-17% to SGD29.8m and SGD30.8m.

A Complementary Acquisition

• Volta operates in the oil & gas industry in the US. It provides integration services that deals with power distribution equipment, such as switchgears and motor control centres among others. This is seen as a complementary buy for CSE Global.
• We understand the latter has partnered with Volta on past projects and, despite the scope and solutions provided being different, the two companies are adjacent to one another. Furthermore, Volta generates a majority of its revenue from the midstream oil & gas sector.
• This acquisition will allow CSE Global to tap onto Volta’s existing network and expand into this midstream space.

Accretive Acquisition

• For a price tag of SGD34.8m – based on a FY18 net profit before tax of SGD6.9m – this translates into 6.7x P/E (NPAT), which is highly accretive in nature. However, CSE Global is likely to gear up as a result of the purchase. If we assume the group will undertake the acquisition fully funded by debt, the PAT should be SGD4.1m due to the additional financing costs. This will translate into ~8.4x P/E – which is still an undemanding valuation – and a net gearing ratio of 20% at group level.
• We understand the business has a good cash flow position – hence, the debt should be taken care of by itself.

Acquisition of Two Properties in the US

• CSE Global has also acquired 100% interest in Volta Properties, which houses two properties, for an aggregate consideration of USD17m (SGD23.6m). These properties are occupied by the newly-acquired subsidiary Volta. The purchase will be funded by both internal funds and bank borrowings.
• We do not expect the addition to have any material impact to CSE Global’s profit & loss statement. However, coupled with the acquisition of Volta, we estimate net gearing at 33%, up from a net cash position previously.

Key BUY With Higher TP

• We keep our call with a higher DCF-backed Target Price of SGD0.69, implying only 11.9x FY20F P/E.
• CSE Global is currently yield of 6%.
• Key downside risks include oil orders intake, lower margins, and execution risks.

Source: RHB Invest Research - 4 Sep 2019