Improving outlook with rising new orders
- FY21 net profit below expectations on lower margins
- Weak revenue from the Americas region cushioned by recovery-led growth in Asia Pacific and EMEA
- Expect higher new order wins for the Energy segment on rising US oil production along with high oil prices
- Cut earnings by 14% to 18% mainly on lower margins; maintain BUY with lower S$0.59 TP
Investment Thesis
Recovery of the Energy segment. We are beginning to see signs of oil production rise in the regions that CSE is operating in, which correlates with the rising oil prices. New order wins for the Energy segment have been relatively weak; we expect this trend to reverse. Sustained levels of elevated oil prices should raise oil and gas activities and could translate into more contract wins for CSE.
New order wins continue to recover. We remain positive on CSE’s recovery as new order wins from all segments continued to recover in the last four quarters. We are also optimistic on CSE’s small acquisitions to enhance and strengthen its operations and recurring revenue stream as well as its pivot towards renewable energy projects (solar and wind). There is also potential for large contract wins in its Energy segment in FY22F.
Infrastructure and Mining & Mineral segments offer sturdy, stable growth. These two segments remained resilient despite the pandemic. We are expecting its Infrastructure segment to continue growing on higher government spending on infrastructure projects, and its Mining & Mineral segment to remain sturdy amidst higher commodity prices.
Valuation:
Maintain BUY with a slightly lower TP of S$0.59 (previously S$0.60). We cut FY22F/FY23F earnings by 14% to 18%, mainly to account for lower margins due to the still challenging environment on the back of the supply chain disruptions. Our new TP of S$0.59 (previously S$0.60) is pegged to a higher 13.8x (+1 SD of its four-year average PE) on FY22F earnings, (vs. 11.5x previously), on the back of the improving outlook.
Where we differ:
We are more cautious on CSE’s earnings’ growth.
Key Risks to Our View:
Protraction of the COVID-19 pandemic, low oil prices, global macroeconomic slowdown, and/or a lack of new order wins.