• CSE GLOBAL LTD (SGX:544) recently announced a major acquisition. It has entered into a membership interest purchase agreement to acquire Volta for US$25.1m (S$34.8m). This is CSE Global’s fourth acquisition this year and the largest in recent years. We estimate earnings accretion of 4.8% and 13.0% for 2019-20 respectively.
• Maintain BUY with a higher PE-based target price of S$0.65 (previously S$0.62) as we factor in earnings contribution from the acquisition.

What’s New

Acquired US industrial power system manufacturer.

• CSE Global has entered into a membership interest purchase agreement to acquire Volta for US$25.1m (S$34.8m), which implies 2.4x P/B based on Volta’s net book value of US$10.5m (S$14.6m) as at 30 Jun 19. We understand that as Volta’s founder was unable to find a successor, CSE Global was deemed a good fit to take over the business.
• Founded in 2005, Volta provides services to the mid-stream oil and gas market, and its client list includes Exxon Mobil, Abadarko Petroleum and BP North America, among others. Volta is principally engaged in developing, designing, manufacturing and servicing custom-engineered electrical equipment centres that:
  • distribute, control and monitor the flow of electrical energy; and
  • provide protection to motors, transformers and other electrically powered equipment.

Stock Impact

Healthy earnings accretion in 2020.

• The purchase consideration of S$34.8m and Volta’s 2018 estimated net profit of S$5.1m (assuming a 25% tax rate) implies 6.7x PE for the deal (CSE Global’s 2018 PE is 11.9x based on the pre-announcement share price of S$0.44).
• We see the acquisition as earnings accretive as the earnings yield of Volta is about 15% (based on 6.7x PE for the deal) vs financing cost of about 4%, should CSE Global decide to fully fund the deal with bank borrowings. We forecast 2019 (4 months’ contribution) and 2020 earnings accretion of 4.8% and 13.0% respectively, derived from net profit contribution of S$1.0m and S$3.0m from the acquisition.
• Given that Volta’s 1H19 PBT was S$8.3m and there could be potential synergies from the acquisition, our estimates are conservative and EPS could rise further. We also note that since Volta provides services to the mid-stream oil and gas segment, it is likely to have stable earnings.

Debt financing should not pose a major issue.

• CSE Global plans to fund the acquisition using internal sources and bank borrowings. Given CSE Global’s net cash of S$8.6m as of 2Q19, we believe there is sufficient debt headroom to fund the acquisition.

Positive outlook for smaller projects and potentially stronger 2H19.

• While the lull in large greenfield projects for oil & gas persists, CSE Global expects to see a steady flow of small projects from its existing customer installed base. Brownfield and small greenfield projects made up 93% of revenue in 2Q19. CSE Global continues to explore projects and new investments; large oil & gas greenfield wins will be a positive surprise.
• There is potential for a stronger 2H19 (2H18 formed 55% of core net profit in FY18) as there were certain project delays in 1H19. Overall, management expects an increase in activities and a better financial performance for 2019.

Attractive dividend yield at 6.0%.

• CSE Global announced an interim dividend of 1.25 cents/share (unchanged from 2Q18) and intends to maintain dividend at 2.75 cents/share for 2019. This dividend target translates into a sustainable dividend yield of 6.0%.

Earnings Revision / Risk

• We raise our net profit estimates for 2019-21 by 4.8%, 13.0% and 11.1% respectively as we factor in earnings contribution, acquisition cost and finance cost, assuming the acquisition is fully funded with debt.
• Risks include lower-than-expected project wins and weak oil prices.

Valuation / Recommendation

• Maintain BUY with a higher PE-based target price of S$0.65 (previously S$0.62), pegged to peers’ average of 15x 2019F PE.

Share Price Catalyst

• Large greenfield O&G project wins.
• Large greenfield infrastructure project wins.
• Accretive acquisitions.

Source: UOB Kay Hian Research - 4 Sep 2019