Strong orderbook, cost pressures overhang
- 1H22 net profit of S$4.5m (-8% hoh, -55% yoy) below expectations on lower energy margins. Strong topline growth of 12% yoy driven by infrastructure.
- Energy 1H22 OPM declined to -1.3% (vs. 1H21: 2.9%) due to higher opex and supply chain disruptions. We think these are unlikely to abate near-term.
- We lower our FY22-24F EPS as we factor in lower margin assumptions. Downgrade from Add to Hold with a lower TP of S$0.45.
1H22: healthy topline growth dragged by weaker margins
1H22 net profit of S$4.5m (-8% hoh, -55% yoy) was below expectations, forming 25%/ 23% of our/Bloomberg consensus’ FY22F estimates. The miss was due to weaker margins for the energy sector, as CSE faced 1) supply chain disruptions negatively impacting lead times, 2) higher staff costs from unabsorbed labour, and 3) higher selling costs from a larger order intake. Energy OPM worsened to -1.3% in 1H22 (1H21: 2.9%), as Americas was hard hit by more competition and few large greenfield opportunities. Positively, 1H22 revenue rose to S$262m (+12% hoh, +12% yoy), largely due to higher infrastructure project revenues (+42% hoh, +48% yoy) in Australia and the Americas. The group proposed an interim DPS of 1.25 Scts, in line with historical issuances.
Strong 2Q22 order wins should help in the coming quarters
CSE’s 2Q22 order wins came in strong at S$189m (-18% qoq, +81% yoy). Energy order wins recovered strongly to S$133m (+26% qoq, +167% yoy), driven by 1) large greenfield solar renewables contract of S$36.5m, and 2) higher flow orders secured. Infrastructure order wins rose 5.2% yoy on the back of higher flow orders from government and utility customers. Mining & Minerals orders were flat yoy at S$13.1m. This further increases the group’s orderbook to S$389m (vs. 1Q22: S$344m), of which the management expects 40% to be recognised in FY22F. We raise our FY22-24F order wins by 10-12% as we
factor in higher energy orders (from flow orders and potentially more renewable projects).
2H22F should be better, but cost pressures to weigh on margins
Management expects 2H22F to record a better financial performance hoh. Recovery in energy project executions and a strong order book should support sequential earnings growth. However, we believe rising cost pressures and supply chain disruptions are unlikely to abate in the near-term, which should weigh on margins. We cut our FY22-24F EBIT by 16-30% as we factor in lower margins for energy and infrastructure.
Downgrade from Add to Hold with a lower TP of S$0.45
With our new assumptions, our FY22-24F EPS is lowered by 14-31%. While we believe the worst could be over, we think margins are unlikely to recover to pre-Covid levels in the near-term. We downgrade our rating to Hold and lower our TP to S$0.45, still pegged to 12x FY23F P/E based on the group’s 10-year historical average. Upside risks include quicker energy sector recovery and more greenfield project wins. Downside risks include prolonged cost pressures resulting in deteriorating margins.
