CSE Global's business diversification, quality management and strong focus on ROE and FCFF have shone through. We find it opportune to take some profits. Downgrade to Neutral from Outperform on the back of its recent outperformance to FSSTI by 27% in Dec. No changes to our earnings estimates though we raise our TP, now based on 7x CY13P/E, one SD below its 5-year mean to reflect its resilence (previously 6x, average during the last crisis).

CSE Global had outperformed the FSSTI by 27% in Dec. Our upgrade on 6 Dec. on valuation grounds appeared to have been timely. In view of lower operating and financial risks today, we had argued that trough valuations were unwarranted.

Still, we expect earnings to slow down. CSE was unable to fight the recession in 2009. Taking a leaf from that downturn, we expect earnings growth to be weaker than the market's more bullish expectations. Eveb if we do not factor in cost overruns from two problematic Middle East projects, 9M11 earnings would have declined 11% yoy. Moreover, we have imputed a fairly decent 2012. We have factored in 20% sales growth for the Asia Pacific (vs. 7% CAGR in the past five years). We believe this business cycle has peaked for CSE Global. We project a 3 year earnings CAGR of 8% through 2012 vs. 30% for the boom years of 2006-2008.

We recommend investors to take some profits. On a rolling forward core P/E basis, the stock is trading above its 5-year mean. A premium gap with the small-mid-cap industrial average has opened up (CSE Global typically trades at a discount). With limited cataysts on the horizon, we believe CSE Global will at best perform in line with the market. Hence, downgrade to Neutral. We would revisit the stock upon stronger-than-expected results or orders. (Read full report)