On 17 November 2022, CSE Global Ltd (“CSE”) have announced their third quarter business updates. In honesty there was not much business updates to take note of so this post used a lot of 2022Q2 figures for analysis. It can be seen that they have been hit by the unfavorable macro-economic conditions which directly affected their bottom lines and financial position. For further details, do refer to the below.
Background
CSE is a Singapore-based technology company, which offers total integrated solutions to industries in the automation, telecommunications and environmental sectors. The Company is engaged in the business of systems integration solution and the provision of computer network systems.
The Company operates through Process Controls and Communications & Security segments. The Process Controls segment provides process control solutions that utilize supervisory control and data acquisition systems (“SCADA”), distributed control systems (“DCS”), programmable logic controllers (“PLCs”), motors, drives and plant transducers.
Its geographical segments include Asia-Pacific, America and Europe/Middle East. It offers safety critical solutions, including emergency shutdown systems, process shutdown systems, and integrated control and safety systems. Its products and services are installed on production facilities, as well as on drilling rigs.
Financial highlights
Revenue
Based on the 2022Q3 results released on 17 November 2022, it was noted the revenue increased by 15.2% to SGD403.2 million for the 9 months from SGD350.0 million 2021Q3. For reference, when extrapolated to the full year, their expected FY2022 revenue is higher than their revenue average since FY2017.
The metrics as of 30 September 2022 is Favorable.
Earnings per share
Based on the announcement on 17 November 2022, earnings per share was not included in the business update for the third quarter of 2022.
It was noted for 2022Q2, the gross profit extrapolated for the full financial year have increased by 7.1% to SGD145.5 million (FY2021: SGD135.8 million).
On the other hand, net profit decreased by 39.8% to SGD9.1 million compared to FY2021. This was mainly due to the impact of newly acquired subsidiaries of SGD2.7 million, higher personnel costs of SGD1.8 million due to increased business activity of existing operations, higher selling and distribution expenses of SGD1.8 million, and upkeep of building and equipment costs of SGD1.1 million.
The decrease in net profit thus resulted in earnings per share to fall proportionately as well.
The metrics as of 30 June 2022 is Unfavorable. Historical earnings per share have been adjusted for the 1 rights share for every 5 ordinary shares in November 2022.
Operating Cash Flows
Based on the announcement on 17 November 2022, cash flow was not included in the business update for the third quarter of 2022.
Cash flows from operations for 2022Q2 have decreased by 72.9% when extrapolated and compared to FY2021.
The metrics as of 30 June 2022 is Unfavorable.
Price-to-book ratio
Based on the announcement on 17 November 2022, Net Asset Value (“NAV”) was not included in the business update for the third quarter of 2022.
NAV of the Group as at 30 June 2022 was to SGD0.3697 per share. Do keep in mind that this was prior to the 1 rights share for every 5 ordinary shares in November 2022. The adjusted NAV over the enlarged number of shares will be SGD0.3081. Based on the closing share price of SGD0.335 as at 2 December 2022, this translates to a Price-to-book (“P/B”) ratio of 1.087.
The metrics as of 30 June 2022 is Neutral.
Debt-to-equity ratio
Based on the announcement on 17 November 2022, financial position was not included in the business update for the third quarter of 2022.
Debt-to-equity ratio as at 30 June 2022 have increased to 128%. This is due to a significant increase in loans and borrowings of the Group.
The metrics as of 30 June 2022 is Unfavorable. Debt/equity ratio has not been adjusted for the 1 rights share for every 5 ordinary shares in November 2022, where the proceeds amounted to SGD33.8 million.
Interest coverage
Based on the announcement on 17 November 2022, interest expense and profit before tax was not included in the business update for the third quarter of 2022.
The interest coverage stands at 4.6 times as at 30 June 2022, using profit before tax of SGD6.5 million and interest expense of SGD1.8 million. The metric is Neutral as the interest coverage is lower than my preference of 5.0 times. This is a concern as interest rates continue to rise as the world looks to tackle inflation, and the Federal Reserve has hiked interest rates to 4.0% recently and is looking to hike to at least 4.75% by end of 2022.
Website: Fed to lift rates by 50 basis points, but peak policy rate may be higher
As the interest rate may potentially increase further, CSE may be subjected to significant change in their cost of debt in the near future. CSE have provided an interest rate sensitivity analysis as part of their annual report 2021 and I have thus performed a sensitivity analysis using the information as at 31 December 2021:
Interest rate sensitivity analysis as below:
Do note the above is my estimation which may be different from management’s estimation. Nonetheless, if the interest rates were to increase by the basis points above, CSE may experience a fall in profit before tax accordingly.
Dividend yield
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. With the recent 1 rights share for every 5 ordinary shares in November 2022, the adjusted dividend per share for 2022 amounted to SGD0.0229 per share. At 2 December 2022, with a closing share price of SGD0.335 and payout of SGD0.0229, this translates to a stable dividend yield of 6.84%. For my benchmark, a general reasonable range would be around an average of 6.0% to 7.0% in the current environment.
Website: Reasonable Dividend Yield Changes
If using dividend yield of 7% as a benchmark, based on the dividend of SGD0.0229 there is potential for CSE to see its share price drop by another 2.3% to SGD0.325. Investors will thus need to be mentally prepared that the share price might further fall if interest rates for safe assets in Singapore approaches to cross 4%.
For CSE, prior to Covid-19, this dividend payout has been sustainable. Ever since Covid-19 however, their earnings per share have been affected, with the current expected FY2022 earnings per share to be SGD0.0147 which is insufficient to cover the dividend payout. If the dividend were to be cut, then the share price might experience more downside in the short term.
They can still maintain their dividend yield as they could adjust the net profit into net profit before depreciation/amortization which would result in the adjusted earnings per share below, which are more than sufficient to cover the dividend payout.
The issue with this however is by doing so, management signaling that there is not much capital expenditure required to replace their assets. Annual repair and maintenance will be sufficient to maintain their assets, which is cheaper than purchasing a new asset. Investors will need to take note if they are comfortable with the idea that their assets are able to last longer than the pre-determined useful lives as at 30 September 2022. Personally I would rather they cut dividends for the next few years until they are able to generate sustainable profits.
The dividend yield is Neutral.
Key things to note
Rights issue
On 2 November 2022, CSE have announced an issue for the 1 rights share for every 5 ordinary shares. The total amount raised is SGD33.8 million.
The rights issue is for potential acquisitions of synergistic communications businesses in New Zealand and the USA and to partially repay some of the loans previously drawn down for certain business acquisitions as part of the Company’s ongoing and prudent balance sheet management and to enhance the financial flexibility of the Group.
It is favorable to raise financing using equity instead of debt in this high interest rate environment, and SGD33.8 million only represents 17.8% of the total equity as of 30 June 2022. Furthermore it is in line with the Group’s diversification into the infrastructure industry markets and participate in an expanding sector where demand for increased connectivity and security is expected to continue to grow. This will allow them to diversify away from over-reliance of the energy sector for income, which is a sunset industry.
However, as this is an overall new sector for CSE, it remains to be seen if the Group have the core competencies to oversee the new operations.
Summary
In conclusion, I can see that the macro environment is starting to affect CSE results. The recent rights issue has shown that there may be working capital issues upcoming which was why they decided to fund the new acquisition using equity.
Nonetheless, CSE is still a company with strong results and sustainable dividend payouts. Despite the uncertainties, CSE has proven itself to be a reliable defensive stock and taking the right steps to strengthen themselves. However, as the macro-environment is expected to worsen at least in the short term, investors do need to keep an eye out for any new information relating to their operations. There may be further downside over the next few months as they re-position themselves.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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