On 27 February 2023, CSE Global Ltd (“CSE”) have announced their full year result for 2022. Their financials have deteriorated in 2022 which is not unexpected given the current macro-environment.
They seemed to have decided to maintain the final dividend of SGD0.015 per share which is the same amount as pre-Covid. Admittedly I was expecting them to adjust the payout per share to take into consideration the rights issue towards the end of the year. Maintaining such a payout would definitely mean the company has to payout more cash in total. With earnings that have deteriorated, I would have preferred if they have reduced the dividends accordingly.
There is also some insider purchase recently, which should be an indication of management’s confidence in the company. The average purchase price is around the current the share price so it could be a good level of support.
Website: Financial Statements And Related Announcement::Full Yearly Results
Photo source: 5 things I like about CSE Global
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
| Metrics | Current | Previous |
|---|---|---|
| Revenue | +19.0% | +15.2% |
It was noted the revenue increased by 19.0% to SGD557.7 million for FY2022 from SGD468.7 million in the previous financial year.
The metrics is Favorable.
Earnings per share
| Metrics | Current | Previous |
|---|---|---|
| Earnings per share | -68.4% | No Info |
The gross profit for the full financial year have increased by 7.6% to SGD146.1 million. The increase is less than proportionate to the increase in revenue due to the notable increase of cost of sales by 23.7%.
With no other notable increases that are not in line with the change in revenue, the result is net profit for the period have decreased by 68.1%. Accordingly, the decrease in net profit resulted in earnings per share to fall proportionately as well to SGD0.0089 per share from SGD0.0282 per share in the previous financial year. This have taken into consideration the enlarged share base due to the completion of issuance of rights shares on 19 December 2022.
The metrics is Unfavorable.
Operating Cash Flows
| Metrics | Current | Previous |
|---|---|---|
| Operating Cash Flows | -100.0% | No Info |
Cash flows from operations for 2022 have decreased by almost 100.0%. The total net cash generated from operations in 2022 amounted to SGD0.01 million, compared to SGD29.38 million in the previous financial year. Notably the decrease was mainly attributable to the lower profit as well as the significant increase in trade and other receivables, contract assets and inventories.
The metrics is Unfavorable. There is an indication of cashflow issues.
Price-to-book ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 1.00 | 1.09 |
NAV of the Group as at 31 December 2022 was SGD0.3453 per share. Based on the closing share price of SGD0.345 as at 27 March 2023, this translates to a Price-to-book (“P/B”) ratio of 1.00. The metrics is Favorable as you are paying for the book value of the asset.
Debt-to-equity ratio
| Metrics | Current | Previous |
|---|---|---|
| Debt-to-equity ratio | 131.9% | No Info |
Debt-to-equity ratio as at 31 December 2022 have increased to 131.9%. This is based on the total equity of SGD212 million and liabilities of SGD280 million. There is a significant increase in loans and borrowings of the Group during the year. The metrics is Unfavorable as it is an indication that CSE may be reliant on external funding for operations.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 2.4x | No Info |
The interest coverage stands at 2.4 times as at 31 December 2022, using profit before tax of SGD8.3 million and interest expense of SGD5.8 million. The metric is Unfavorable 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 on 22 March 2023 has hiked the interest rates to a range between 4.75% and 5.00%.
Website: Fed hikes rates by a quarter percentage point, indicates increases are near an end
Dividend yield
| Year | Yield | Total |
|---|---|---|
| 2022 | 4.35% | SGD 0.015 |
| 2022 | 7.97% | SGD 0.028 |
| 2021 | 7.97% | SGD 0.028 |
| 2020 | 7.97% | SGD 0.028 |
| 2019 | 7.97% | SGD 0.028 |
| 2018 | 7.97% | SGD 0.028 |
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. Despite the recent 1 rights share for every 5 ordinary shares in November 2022, management have still declared a final dividend of SGD0.015 per share although there is an enlarged share base.
This is an indication that management may be intending to continue their dividend payout of SGD0.0275 per share in 2023. At 27 March 2023, with a closing share price of SGD0.345 and an expected payout of SGD0.0275, this translates to a dividend yield of 7.97%. For my benchmark, a general reasonable range would be around an average of 5.5% to 6.5% in the current environment. CSE is above the range.
Website: Reasonable Dividend Yield 2023Q1
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 FY2022 earnings per share to be SGD0.0089 which is insufficient to cover the dividend payout.
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.
| Description | Amount |
|---|---|
| Net Profit | SGD 4,808,000 |
| Depreciation and amortization adjustment | SGD 19,825,000 |
| Adjusted net profit | SGD 24,633,000 |
| Number of shares | 618,548,000 |
| Adjusted earnings per share | SGD0.040 per share |
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 31 December 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. 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.
Insider purchase
Between Mar 9 and Mar 10, the executive director, group managing director and CEO Lim Boon Kheng acquired 864,600 shares at an average price of SGD0.345 per share. With a consideration of SGD298,287, this increased his total interest in the company from 2.57 per cent to 2.71 per cent.
Insider purchases are generally a good indication of management’s confidence in the company.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Revenue | +19.0% | Favorable |
| Earnings per share | -68.4% | Unfavorable |
| Operating Cash Flows | -100.0% | Unfavorable |
| Price to Book Ratio | 1.00 | Favorable |
| Debt-to-equity ratio | 131.9% | Unfavorable |
| Interest Coverage | 2.4x | Unfavorable |
| Overall | | Unfavorable |
In conclusion, I can see that the macro environment has affected CSE results. Their overall financial performance have deteriorated in 2022 and 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.
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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Website: CSE Global Ltd. (SGX: 544): 2022 Third Quarter Business Update
