Analysts at CGS International and UOB Kay Hian Research have kept their respective “add” and “buy” calls at respective raised target prices of 62 cents from 57 previously and 60 cents from 56 cents previously on CSE Global following its healthy 1HFY2024 ended June earnings, which came in 36.4% higher y-o-y at $15 million.
Similarly, Maybank Securities has maintained “buy”, albeit at an unchanged target price of 64 cents.
CSGI analysts Kenneth Tan and Lim Siew Khee note that the company’s net profit for the period beat their $13 million estimate, forming 53% of theirs and 55% of Bloomberg’s FY2024 estimates.
Tan and Lim note that the strong showing was driven by a stronger-than-expected earnings before interest (ebit) of $25 million, thanks to CSE’s energy segment seeing strong margin recovery of 3.5 percentage points (ppts) y-o-y.
“Revenue growth came in strong, led by robust infrastructure and steady energy,” write the analysts in their Aug 7 report.
The analysts note that CSE’s proposed interim dividend per share (DPS) of 1.25 cents, indicates a “decent” FY2024 yield of 6.1%.
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Meanwhile, the company’s orders wins of $204 million in the 2QFY2024 was 10% higher q-o-q and 12% lower y-o-y. Of this, energy and mining wins were down 27% y-o-y and 12% y-o-y respectively, while infrastructure wins inched higher by 1% y-o-y.
Tan and Lim write: “This brought 1HFY2024 order wins to 39% of our FY2024 forecast. We note that CSE’s historical order wins tend to be seasonally weaker in 1HFY2024.”
They add that CSE “remains optimistic” of healthy order win momentum in the second half, with several electrification contracts in the pipeline and a “well stocked” order book of $692 million.
“We maintain our FY2204 order win forecast of $1.0 billion as we are optimistic of order win acceleration in 2HFY2024,” write the analysts.
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With the company intending to ramp up higher-margin projects in the energy segment, Tan and Lim believe that energy segment margins should continue to be sustainable at 5% to 6% over FY2024 to FY2026.
The analysts continue: “We remain upbeat on CSE’s strong earnings growth outlook over the coming quarters, premised on the increasing proportion of higher-margin infrastructure contracts, strong recovery in energy margins, improved operating leverage, and the successful integration of newly acquired subsidiary RFC Wireless.”
Tan and Lim conclude: “We raise our FY2024 to FY2026 core earnings per share (EPS) by 4% to 7% as we bake in higher ebit margin assumptions.”
Re-rating catalysts noted by the pair include strong infrastructure order win momentum, while downside risks include major project cost overruns, and a sharp decline in order wins from deteriorating macroeconomic conditions.
Meanwhile, UOBKH’s John Cheong and Heidi Mo note that the newly-acquired RFC Wireless is earnings-accretive at 5 times price-to-earnings ratio, and a positive addition for the company to strengthen its critical communications network in the Americas region.
“We expect roughly $1 million in contribution from the completed acquisition of RFC Wireless,” write Cheong and Mo.
On the company’s outlook, the analysts write that CSE will pursue new market opportunities and diversify into new markets brought about by trends in urbanisation, electrification and decarbonisation.
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They write: “We have also raised net margins to 3.5% to 3.8% across the same period as we anticipate higher operating leverage, leading to a significant 19% to 20% increase in our FY2024/FY2025/FY2026 earnings forecasts.”
Finally, Maybank’s Seet expects $70 million to $100 million in contract wins by end-August.
He adds: “With the increase in demand from trends such as digitalisation which has led to more data centre projects as well as electrification, CSE has increased its technical resources and production capacity by 50% to 80% to support the growth in data centre projects.”
Seet concludes that the company “offers a unique opportunity” for investors “to ride” oil and gas upcycle in attractive growth areas. “There is also a strong possibility of management share buy-backs and company share buy-backs.”
Share price re-rating factors noted by Seet include strong net profit after tax (NPAT) growth of 250% and 30% y-o-y in FY2023 and FY2024 respectively and CSE’s trading at a significant discount compared to peers.
Meanwhile, upswing factors include CSE’s upside to the US oil and gas upcycle, while downsides include foreign exchange (forex) fluctuations which could impact profitability due to the company’s presence in many countries.
Shares in CSE Global 544 closed 1 cent higher 2.15% or up at 47.5 cents on Aug 8.
