CSE Global Ltd (“CSE”) is a leading global technologies company with an international presence spanning the Americas, Asia Pacific, Europe, Middle East and Africa.
Their operations focus on the provision and installation of a variety of control systems as well as turnkey telecommunication network and security solutions, targeting the oil & gas, infrastructure and mining industries.
Their operations are mainly derived from the America with up to 61.9% of its full year revenue for FY2019. This is good given that the large market overseas will allow them to be able to expand easily to attract more customers, something that I believe the Singapore market is lacking.
The Company have represented that for their oil and gas business, they will continue to explore new working opportunities in large greenfield projects, while expanding upon their existing pipeline of small greenfield projects and brownfield projects in the Gulf of Mexico.
However in the recent years, there was an increasing trend of the Company building up their competencies in the infrastructure industry.
The Company’s Infrastructure business relies heavily on Australia and Singapore’s infrastructure investments. According to Infrastructure Australia in its 2019 Australian Infrastructure Audit, a new wave of investment and reform is needed to ensure Australia’s infrastructure continues to support quality of life and economic productivity over the next 15 years. Growing demand and a mounting maintenance backlog are putting unprecedented pressure on the infrastructure services that every Australian relies on, including energy, transport, communications, etc.
The Company is therefore looking to capitalize on the opportunity to provide energy solutions to railway lines, ports, airports as well as new suburbs as Australia’s government strives to plug the infrastructure gaps. This signifies growth opportunities that the Company can leverage on. If the Company is able to benefit from this expansion, this will provide earnings visibility for the next few years.
Website: An Assessment of Australia’s Future Infrastructure Needs
Financial highlights
The Company’s net asset value per share stands at 37 cents as at 30th June 2020. This translates to a Price to Book ratio of 1.4 based on the share price of $0.525 as at 21st August 2020 (Friday closing price), which fits my criteria of not paying a premium for its book assets.
On 5th August 2020, CSE reported a 53.4% y-o-y increase in net profit to $15.1 million for the first half of 2020, and a 25.7% y-o-y growth in its order intake to $242.1 million for the same period. This is good considering the major disruptions occurring around the world due to Covid-19.
One key thing noted is their borrowings. In 2019, they had drawn significant borrowings as compared to 2018, and at 31st December 2019, loans and borrowings stood at $102 million (2018: $36 million). This was used to fund the acquisition of RCS, a radio communications service provider in Queensland, allowing the Group to strengthened its presence in the Mining & Mineral segment in Australia.
Since then they have managed to pay down $17 million of the loans and borrowings as at 30th June 2020, only $85 million is left outstanding.
Dividend
The Company does not have a formal dividend policy but the Board have represented that they will strive to provide sustainable dividend payouts.
Since 2015, CSE have been consistently giving dividends of 2.75 cents per share. This in my opinion has been sustainable, as the Company’s diluted earnings per share for the financial year ending 31 December 2019 is 4.66 cents per share. The diluted earnings per share for the first half of 2020 is already 2.92 cents per share, which is more than sufficient to cover the dividend payout.
At the current share price of $0.525 on 21st August 2020 (Friday closing), this translates to a stable dividend yield of 5.24%. For a stable stock, this is fairly attractive to me.
Temasek Holdings
On 7th July 2020, Heliconia Capital Management, a wholly-owned subsidiary of Temasek Holdings, has become a substantial shareholder of CSE following the acquisition of a 25.03% stake through a married deal with Malaysia’s Serba Dinamik International Ltd..
While I was not following the share a few years back, it was worth noting that when Serba Dinamik International Ltd. first became a substantial shareholder, there were a lot of expectations that the new substantial shareholder was able to help them venture into new markets. To the disappointment of previous shareholders, this did not materialize before the sale to Temasek.
Temasek has a stronger brand name and may be able to help CSE reach greater heights. However we should not expect this to happen. Instead, we should focus on their current capabilities and any from Temasek should be treated as a bonus.
Website: Temasek unit now substantial shareholder of CSE Global after buying 25% stake
Key things to note
Revenue stream
For the financial year ended 31 December 2019, their revenue breakdown by segment is as below:
It was worth noting that 65.1% of their revenue comes from the Oil & Gas industry. The Oil & Gas industry is one of the worst hit during this Covid-19 period. This is especially so as global travel comes to a halt and as a result, less oil is consumed.
Oil prices actually went negative. Where it means that sellers are paying buyers to take the contracts off their hands, presumably due to the lack of storage as supply far exceeds demand.
Website: Crude oil prices turn negative on US-China tensions, corona cases
With less consumption, we can expect demand for oil to continue to be suppressed for longer periods of time. For Companies in the Oil & Gas industry, this would translate to potential extended losses as countries continue to be heavily restricted and key metrics, such as Purchasing Managers Index (“PMI”), continues to indicate a slower economic growth.
While Covid-19 will not have a direct impact to the Company for the first half of 2020, I am expecting some downturns in the next few months as their Oil & Gas customers cut back on spending and potentially cancel contracts. This kind of impact can only be fully quantified from 2021 onward.
Summary
For CSE, I like the Company for its dividend yield and not having to pay a significant premium for their book value. Temasek becoming a substantial shareholder also adds to short-term stability of the Company. After Covid-19, I am expecting the Company to be able to significantly grow and expand.
Based on my current estimates, excluding any potential large contract wins, the share price of $0.525 is already Fully Valued. However, I am personally vested in this and looking forward to any announcements on future growth. This will allow for more share price appreciation and dividend yield increase.
